This article was updated on 10/6/2021.
While we’re all generally familiar with what a recessionary stock market entails, the impacts of a recession on the commercial real estate industry need to be examined as well.
Historical Recession Performance
To get a better perspective on commercial real estate, a closer look at its historical performance is essential. The last four decades have seen five distinct periods of recession. CBRE compiled data related to the performance of the multifamily, industrial, and office sectors over the course of the two most recent recessions of 2001 and 2008-09.
Amidst the 2001 recession, the CBRE research indicated that multifamily real estate assets fared better than both office and industrial properties. All downward trends in the multifamily space reversed sooner and lasted for a shorter amount of time when compared to the other two markets. Further, the post-recession rebound was significantly stronger in multifamily holdings than in industrial and office real estate assets. During the 2008-2009 financial crisis, the same trends held true: performance for multifamily assets noticeably outstripped both those of industrial and office assets. Regardless of whether you compare the scope of downward growth, returns to previous highs, or growth beyond prior peaks, all data indicates that commercial multifamily real estate outperforms its peer commercial real estate asset sectors under recession conditions.
Looking back even further, the National Council of Real Estate Investment Fiduciaries (NCREIF) has been recording data on the different commercial real estate asset classes since 1977. The NCREIF Property Index (NPI) is an aggregated database that illustrates property returns on a quarterly basis for all commercial real estate categories and is one of the most referenced performance indicators for institutionally held private properties. An examination of 20 years-worth of data from the NPI index spanning from 1978 to 1997 shows that the multifamily real estate sector vastly outperformed the other asset classes of hotel, industrial, office, and retail. It was the only class to have a median annual return in the double-digits over those two decades.
The National Multifamily Housing Council (NMHC) conducted a February 2018 study in which they contrasted the historical market behavior of the apartment, industrial, retail, and office asset classes between the dates of 1987 and 2016. Once again, the data indicated that when it came to all extended holding periods ranging from three to fifteen years, apartments exhibited the most optimal returns, most favorable risk-adjusted returns, and smallest standard deviation.
Of course, there have been times where certain asset categories did better than the multifamily sector. Still, from a long-term perspective, the apartment class has routinely been the leader when it comes to performance metrics.
COVID-19’s Impact on the Commercial Real Estate Sector
The optimal historical performance of the multifamily real estate asset class, both in times where the economy is booming and during recessionary periods, is well documented by the aforementioned data studies. Notwithstanding, the coronavirus pandemic is an unprecedented external market factor that has produced an equally unique impact on the market. And while it is still too early at this point to fully understand the totality of the virus’ ongoing effects on the economy, the initial three months of available data can be examined to give us a better indication of what the future has in store.
For example, the NMHC issues a rent collection tracker every month. Although the majority of economists anticipated that a significant percentage of rents would be delinquent, that hasn’t been the case at all. Data compiled from more than 11 million apartments indicates that approximately 95% of renters submitted their rental installments on time in both April and May—only a modest decrease from the approximately 97% that did so the year before.
Commercial multifamily real estate has consistently proven to be one of the most resilient and top-performing real estate asset classes. Due to the constant demand for housing regardless of market conditions, the apartment sector is insulated from economic turbulence—which makes it an invaluable commodity in any optimally diversified investment portfolio. While it is too soon to tell how COVID-19 will impact the market long term, there are hopeful indicators that commercial multifamily real estate will weather this storm as it has in past recessions.