What You Need to Know About Multifamily Development in a Recession

Posted by Eric Nauta on June 14, 2019

Experts say signs indicate a recession is likely to come soon. The Motley Fool confirms the warnings are there.

The signs of a recession include the following:

  • Unemployment rate peaking
  • Inflation climbing
  • Yield curve decreasing
  • Credit card debt and late payment rising
  • Home sales flattening
  • Economic expansion cycle tightening

Fortunately for the multifamily industry, a downturn actually helps growth. Mounting interest rates force many to opt for renting and that's the good news for apartment properties. However, it doesn't mean the multifamily sector is recession-proof.

Some things can be controlled, and others can't. Here are the barriers multifamily development may face in a recession.

Lack of Available Land

Of course, no construction can occur where there's already property in place like mountains and lakes where building can't happen. Additionally, most cities have land restraints and policies in place to protect existing land for farms and forests.

It doesn't help that the soaring housing prices lead to the need for more affordable places to live. Some cities have established ordinances and zoning to require new developments to build affordable housing. Plan for a possible downturn by ensuring you have land.

Rising Costs

Construction has a crisis of its own with a labor shortage. The Construction Specifier refers to an analysis done by General Contractors of America. It shows that when there are labor shortages and tariffs, construction costs climb. Clearly, it's a catch-22.

Another factor in costs is fuel. The rising cost of fuel has a domino effect that can lead to construction materials arriving late to their destinations. National Real Estate Investor reports the producer's price for diesel fuel has climbed more than 30 percent in one year, ending in August 2018. Higher fuel costs can result in higher construction material costs.

Human Factor

Many residents incorrectly believe that multifamily development will negatively impact their cities. For instance, opponents of apartment development claim that adding more apartments will burden the already overwhelmed school districts. A Harvard University study refutes this theory.

The short version: the average 100 single family homes contain 51 school-aged children. A 100-unit apartment property, on the other hand, has an average of just 31 children. That's because the people who elect to live in apartments are typically singles, empty nesters, and couples without children.

The interesting thing is that the gap widens when you consider new construction only. Then the numbers change from an average of 64 children from 100 single family homes and 29 for 100 apartment units.

Citizens also believe that multifamily developments decrease home value. The Harvard report refers to a 2000 U.S. Census Bureau study on working communities. These are areas with primarily low- and moderate-income working households. The study concludes that such communities with apartment development have higher property values than others.

How Do Multifamily Developers and Property Owners Respond?

What does all this mean for the apartment development with an upcoming recession? Property owners and developers can plan for contingencies by staying updated and planning a bit in advance.

They could do a fact-finding mission on the benefits of multifamily development to present to their city officials or conduct free educational sessions around the city to explain the benefits of apartment development to residents. Remain current on city policies, land availability, and costs. Use the knowledge to plan.

Multifamily residential property owners and managers can also investigate amenities to offer their tenants such as apartment security. Residents put a high priority on security because the National Crime Prevention Council (NCPC) data shows that multifamily residents have an 85 percent greater chance of burglary than single-family homes.

Investing in security technology can deliver a quick ROI and give residents peace of mind. To learn about multifamily residential security technologies, please contact us.

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