Commercial Real Estate Investments In Recessionary Times

The longest bull market in history came to an end in March 2020. A pandemic-driven economic shutdown plunged us into a recession. And while we all know what a recession means for the stock market, one has to wonder what it means for commercial real estate.

To better understand the performance of commercial real estate, let’s look to the past. Over the last 40 years, there have been five distinct recessions. CBRE evaluated the performance of multifamily, industrial and office real estate during the last two of those recessions (2001 and 2008-09).

2001 Recession

During the 2001 recession, CBRE found that multifamily outperformed office and industrial real estate. Any negative growth trends seen during the recession were more prolonged in industrial and office while minimized in multifamily.

Additionally, the post-recession recovery was far more robust for multifamily than it was for those other two commercial real estate asset classes.

2008-2009 Recession

When CBRE looked at the Great Recession, it found the exact same picture: Not only did multifamily outperform industrial and office real estate; it also surpassed retail real estate.

Whether you look at negative growth trends, return to prior peak or growth past prior peak, it’s not even close. Commercial multifamily real estate far outperformed the other commercial real estate asset classes.

The superior performance of multifamily in the last two recessions is interesting, but let’s go back further and see how it performed in older recessions.

NCREIF Property Index

The National Council of Real Estate Investment Fiduciaries (NCREIF) has been tracking the performance of commercial real estate since the fourth quarter of 1977. The NCREIF Property Index (NPI) is a composite index that reflects quarterly property returns for apartment, hotel, industrial, office and retail real estate. It’s the most commonly quoted performance measure for institutionally held private real estate.

In 1998, a research paper entitled “Twenty Years Of The NCREIF Property Index” (download required) was published. That study looked at the performance history of NPI from 1978 to 1997. This time period encompasses the other three recessions that occurred over the last 40 years.

What it found was that during that 20-year period, multifamily real estate outperformed the other commercial real estate asset classes. In fact, it was the only commercial real estate asset class to average a double-digit annual return over that period.

Not only did the research show that multifamily had the best overall annual return; it also had the best risk-adjusted return (Sharpe ratio) with a low standard deviation.

Multifamily Real Estate

Certainly, there have been years in which other commercial real estate asset classes have outperformed multifamily. However, over the long haul, apartments have consistently been the top performer.

In February 2018, the National Multifamily Housing Council (NMHC) authored a study titled “Explaining The Puzzle of High Apartment Returns.” It compared the performance history of apartment, industrial, retail and office real estate from 1987 to 2016.

What it found, yet again, was that over all long-term holding periods (three, five, seven, 10 or 15 years), apartments had the highest returns, best Sharpe ratio and lowest standard deviation. In other words, apartments consistently outperformed the other commercial real estate asset classes.

Covid-19 And Commercial Real Estate

Multifamily’s superior performance history both in good times and in bad is well established. However, the global pandemic caused by Covid-19 is far from your average recession. And while the history books are yet to be written about its economic effects, we do have the first 90 days that we can evaluate.

Take, for example, rent collections for apartments. NMHC publishes a monthly rent tracker. While many expected a large number of renters to forgo their rental payment obligations, it simply hasn’t materialized. Data from over 11 million apartment units shows that 94.6% and 95.1% of renters made their monthly payments in April and May, respectively. That is only minimally down from the same time period in 2019 (97.7% in April and 96.6% in May).

In contrast, consider the year-over-year declines for hotels (paywall). Statista reports that the week ending May 30, 2020, saw an average occupancy rate of 36.6%, an average daily rate of $82.94, and revenue per available room (RevPAR) of $30.34. That’s a year-over-year decline of 43.2%, 33.3%, and 62.1%, respectively.

In fact, as of May 2020, more than a third of hotel CMBS loans and a quarter of retail CMBS loans are currently on servicer watchlists due to distress.

Conclusion

Time and time again, commercial multifamily real estate has proved its mettle as a top-performing asset class. A big part of its recession-resistant nature lies in the resilience of housing and the basic need for shelter.

This insulates apartments to a large degree from the ups and downs of the market cycles. With the low correlation to the market, strong performance history and recession-resistant nature of apartments, it’s not surprising that many people see commercial multifamily real estate as an essential component of their portfolios.  Be sure to use a Realtor with knowledge of the area and who can give you good advice based on knowledge and experience.

If you have any questions about the real estate market, investment opportunities and if you want to sell your house or need help finding the right home for you – Talk To Tammy, 636.931.9100 !

Should I Sell My Home During The Coronavirus Pandemic Or Wait?

Jefferson County is considering easing restrictions on its stay-at-home order because of the coronavirus outbreak -businesses in downtown Hillsboro and throughout Jefferson County will be finding out soon about new guidelines for operations when they reopen on May 4th.

In the residential real estate market, we’ve begun to make the changes necessary to have a functioning seller market.  Here are some of the changes that have been made in the Greater St. Louis Metropolitan Area:

  • No more open houses crammed with people
  • Wearing masks and gloves during showings
  • The institution of a new contract rider for coronavirus
  • Title services are now also done as a drive up service.

County Executive Gannon says businesses will be operating under a new normal with some restrictions in place when they reopen. He hopes to have those new guidelines finalized soon. The stay-at-home order ends May 3rd.

Don’t sell your home because of a pandemic –  don’t sell your home because your neighbor is panicking.  Look at all the data you have in front of you and make a decision that you are most comfortable with. 

We are here to help you find the perfect buyer, call: 636-931-9100 !

Will COVID-19 Shift Conditions to a Buyer’s Market or Seller’s Market?

The current market stall in response to COVID-19 presents a unique challenge for market tracking moving forward, and likewise for buyers and sellers trying to understand the housing market that they are walking into. Months’ supply represents the dynamic between listings and sales. As each side of the homebuying transaction responds distinctly to the COVID-19 situation, this dynamic shifts, and “buyer’s market” and “seller’s market” labels along with it.

So, will COVID-19 shift conditions to a buyer’s market, or a seller’s market?

On the one hand, the rate of new listings entering the market has gone down dramatically, adding very little new inventory to the national pool of listings. Likewise, there are fewer closed sales due to social distancing measures. The lack of new listings bottlenecks the potential of sales. If the downturn is roughly equal in listings and sales, then months’ supply as a metric would continue its current trend.

However, as the market resets and picks back up later in the year, listings and sales will likely ramp up at different times, which will have distinct effects on this buyer/seller relationship. As listings reach a critical mass to entice prospective buyers, this accumulation of listings will drive up months’ supply figures, temporarily shifting us to a buyer’s market. Then, as the rate of buyers catches up to listings, this sales and listings dynamic will continue to balance out. Where it ends up at the end of the year, however, remains to be seen.

FAQs during these hard times…

I’m worried about my credit score. What should I do if a miss a few payments due to the crisis?

The CARES Act implemented provisions to protect credit scores from January 30, 2020 through 120 days after enactment of the national emergency. If customers are making payments, or made arrangement to not make payments, customers must be reported as being current. If a customer was delinquent, but was able to make an arrangement with the servicer and is now current, then their account must be reported as current. The important thing is to reach out to your servicer, bank or credit card company if you are having trouble making your payments.

I have heard that the FHA, Fannie Mae, and Freddie Mac have raised rates and fees on borrowers with lower credit scores or smaller down payments?

Fannie Mae and Freddie Mac have not made any changes to credit scoring or down payment requirements. The only change they have made for borrowers is to allow MORE flexibility in how a lender can verify employment. Many individual lenders are adding their own, higher standards on these products. The rational is that the cost of servicing these loans has surged due to the widespread forbearance that is taxing servicers’ resources. Under forbearance, the servicer must continue to pay PITI to the investor, but the sheer volume of forbearance to deal with the COVID-19 response is unprecedented. Since lower-credit borrowers are more likely to take forbearance and servicing is harder to get, lenders are less willing to extend this credit regardless of the FHA or GSEs’ standards.

I’m not sure I will be able to pay or file my taxes on time for 2019; What do I do?

The IRS has delayed the due date to file and pay any taxes that are due to July 15, 2020, without penalties or interest. For more IRS information, check here.

We’re still here for all of your real estate needs, call: 636-931-9100!

Your #TalkToTammyTeam

THE IMPORTANCE OF PAYING PROPERTY TAXES

Property taxes are a very important part of homeownership. Homeowners can either have the taxes added to their mortgage statements that the lender deposits in an escrow account or they can pay them separately but it’s important to pay them. Governments assess property taxes based on location and value. Property taxes paid by homeowners are used by counties and states to provide critical services and infrastructure such as police services, fire services, schools, roads and highway construction, and other uses that vary by jurisdiction. 

As home prices continue to rise which means higher property taxes, it is important that homeowners pay property taxes because failure to pay tax results in the local government imposing a tax lien on your property that has to be paid within a certain period or else the property gets foreclosed.

How Property Tax Liens Work

When a homeowner fails to pay their taxes, the local government imposes a tax lien on your property. A tax lien is a claim on the owner’s property. When a homeowner fails to pay their taxes after 12 months the county will then create a certificate for the amount of the unpaid taxes. The certificates are then sold to individuals or investors so that the unpaid property taxes are monetized. Therefore, investing in tax lien certificates help to support states maintain police, fire departments, hospitals, and other necessities. There are three major parties involved in these transactions, the homeowner, investor, and the courthouse. These certificates are bid on, either by bid down auction where the interest rate is lowered per bid or a premium bid or bid up where the winner is the highest bidder. Individuals who want to invest their money have paid for the certificate because the interest imposed on the unpaid tax is now received by the investor rather than the local government.  Moreover, after the redemption period, they are able to begin the foreclosure process and possibly possess the property. If this process is done with sound research and proper paperwork, the owner of the lien can then control the ownership rights to the property. While foreclosure is an option, it is in the interest of the owner and the mortgage originator to work together to so that the owner is able to pay the taxes before the redemption period because a tax lien takes precedence over the lien of the mortgage lender. The tax foreclosure window is typically a 60-day period to get letters out to all parties invested in the property. Those who wish to foreclose will need to also produce a deed application that carries a fee as low as $39 but can be up to $875 in some states but differs per state. If the foreclosure process is complete then the investor would be able to get a property free and clear just for the fees paid in taxes which would be a great investment.

Chron.com reports(link is external) that tax lien states are Alabama, Arizona, Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nebraska, New Jersey, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Vermont, West Virginia, and Wyoming. The District of Columbia is also a tax lien jurisdiction.

Illinois has the highest interest on tax liens of 36% followed by Iowa at 24%. Indiana, Missouri, Montana, and South Dakota have the lowest interest rate of 10% which is added to unpaid taxes. The redemption periods are also typically less than three years.