Recession Proof Investments

Everybody is looking for recession proof investments. Why is this? Depending on who you talk to, we’re either already in a recession or soon to be in one.

Either way, it’s not our first recession and it certainly won’t be our last. That’s why it’s important to have some recession proof investments in your portfolio.

I’ll use the term recession proof in this article, but just remember that there are no absolutes when it comes to investing. So when I say recession proof, I mean recession-resistant. And while it’s easy to use the term, it’s harder to back it up. I’ll show you the data over the last seventy years and across ten recessions that proves how strong of a recession proof investment multifamily real estate is.  

Let’s start by reviewing just one aspect – vacancy – to see its resiliency.

Between 1956 and 2022 the national apartment vacancy rate moved between a low of just above 5% and a high of slightly more than 10%. That’s a +90% – 95% occupancy rate for the past nearly seven decades.

During that same time period, there have been 10 recessions and yet apartments have remained +90% to 95% full. Now, let’s take a deeper dive into this Federal Reserve data and look at what happened to the rental vacancy rate during each of these past recessions.

Historical Recessions & Their Multifamily Real Estate Vacancy Rates

Aug. 1957 – April 1958 Recession

  • 5.3% vacancy rate (start) – 6.3% vacancy rate (end)

April 1960 – Feb. 1961 Recession

  • 8.0% vacancy rate (start) – 8.9% vacancy rate (end)

Dec. 1969 – Nov. 1970 Recession

  • 5.1% vacancy rate (start) – 5.2% vacancy rate (end)

Nov. 1973 – March 1975 Recession

  • 5.8% vacancy rate (start) – 6.1% vacancy rate (end)

Jan. 1980 – July 1980 Recession

  • 5.2% vacancy rate (start) – 5.7% vacancy rate (end)

July 1981 – Nov. 1982 Recession

  • 5.0% vacancy rate (start) – 5.5% vacancy rate (end)

July 1990 – March 1991 Recession

  • 7.2% vacancy rate (start) – 7.5% vacancy rate (end)

March 2001 – November 2001 Recession

  • 8.2% vacancy rate (start) – 8.8% vacancy rate (end)

Dec. 2007 – June 2009 Recession

  • 9.6% vacancy rate (start) – 10.6% vacancy rate (end)

Feb. 2020 – April 2020 Recession

  • 6.6% vacancy rate (start) – 5.7% vacancy rate (end)

As you can see, vacancy rates for resident-occupied rental properties remain low even during recessions, having never increased more than 1.0 percentage point. This resilience allows multifamily real estate to resist the financial drag of a recession and continue to cash flow through a recession. And that alone makes it a recession proof investment.

The data isn’t surprising given that investing in apartments is an investment in the basic need of shelter. And no matter what the economy is doing, people still need a roof over their heads. 

Compare this with the stock market. 

Every recession during the last 100 years has resulted in an associated decline in stock prices. On average, those declines were -28%. That’s not to say you shouldn’t have stocks, but they are volatile, and adding multifamily real estate can introduce stability to your portfolio.

Rent Inflation

The evidence is clear that apartments stay highly occupied in good times and in bad. But what happens to the rent people pay during recessions? If rent prices deflate during a recession and drop -28% like the stock market, wouldn’t apartment owners be in a world of hurt?

Perhaps, but that’s not what has happened, because apartments are a recession proof investment. If you look at historical median monthly rents going back to 1940 you notice that rents have grown over time.

Source: iProperty Management

And if you study monthly rent inflation graphs going back to the 1950s, you’ll notice a similar story. From 1954 to 2022 rent inflation in the U.S. averaged 4.16%. Its all-time high was 20.85% in June of 1980 and its all-time record low was just  -0.73% in April 2010. 

In the graph below, the same ten recessions we discussed earlier are highlighted in gray on the timeline. 

During those recessions, rent inflation sometimes accelerated, sometimes decelerated, and sometimes flattened out. But in nine of the last ten recessions, rent inflation was positive. 

Only once, over the last sixty-eight years (during the Great Recession), did rent inflation actually become negative. And even then, it was a minimal amount of -0.73%. In contrast, the S&P 500 dropped -46.13% during the Great Recession.

Source: Trading Economics

It is also worth noting that, according to the National Bureau of Economic Research, during recessions real estate home prices have declined in all but one recession since 1980. In contrast to the increasing rents during recessions, this makes multifamily real estate investments more secure than single-family real estate properties.

Commercial Real Estate during Recessions

While the vacancy rates in multifamily apartments remain strong during a recession, this trend does not carry over to all types of real estate. Historically, recessions have had a more significant negative impact on the commercial real estate industry. During a recession, businesses often face decreased demand and lower profits, which can lead to lower demand for office space or storefront real estate. If a recession carries on long enough, it can lead to business closures and higher vacancy rates in commercial properties. 

Furthermore, In a 2018 study by the National Multifamily Housing Council (NMHC), researchers reviewed the performance of apartment, industrial, retail, and office real estate from 1987 to 2016. The results of the study showed that over holding periods of 3, 5, 7, 10, or 15 years, apartments consistently outperformed the other commercial real estate asset types. It bears repeating, multifamily real estate is a highly recession proof investment.

Assets that are sensitive to economic cycles like office and retail certainly have their merits, but they should not be considered recession proof investments like multifamily real estate. 

How Interest Rates Impact Recessions

Interest rates and recessions have a close historical relationship, as changes in interest rates can play a significant role in the onset and severity of economic recessions. During a healthy and growing economy, central banks will typically raise interest rates to curb inflation and keep the economy from overheating. However, when the economy slows down, central banks will often lower interest rates to stimulate economic activity and encourage borrowing and spending.

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Recession Proof Investments

Recessions are economic contractions typically defined as a decline in GDP across two successive quarters. Economic activity, employment, and consumer spending all falter. And the stock market can fall off a cliff. 

But multifamily real estate is different. It’s a recession proof investment because people need a roof over their heads in good times and in bad. That’s why apartments stay +90% – 95% full during a recession and rents continue to grow too. The facts are clear, multifamily real estate is one of the most inflation-resistant and recession proof investments available. 

In addition, recessions can also impact the availability of financing for new real estate developments. This can make it more difficult and expensive for investors to acquire and develop new rental properties, leading to a slowdown in the pace of new construction and investment activity in the sector.

Invest in Apartments

At 37th Parallel Properties, we pay close attention to vacancy rates and rent inflation. We stress test every property we make offers on because protecting investor capital is our number one priority. That allows us to offer one of the most recession proof investments available in today’s market. 

In our underwriting process, we will double the historic market vacancy to see if the property could sustain that level of disruption and still not lose money. We buy properties that have cash flow on day one so we don’t have to depend on rent inflation to be profitable. 

We understand that rent inflation in the markets we invest in is inevitable. But we don’t rely on it. If a property doesn’t pass these tests, we move on and let somebody else buy that property.

This conservative approach means that we pass on a lot of properties. But it’s also part of the reason why we have a 100% positive track record for success over $1 billion in transactions and more than 15 years in business spanning two recessions. We’ve made our investors money in good times and in bad. If you’re not already invested in apartments or want to allocate more to your portfolio, you should check out the 37th Parallel Properties advantage. And if you’re looking for recession-resistant assets in a diversified fund then our current Income and Total Return Fund II just might be right for you.

How can we help?

Whether you’re an experienced investor or new to direct multifamily investing, we’re here to help.

We look forward to hearing from you.