Will a Recession Cause Upwards Pressure on Rents for Multi-Family Properties?

Shifting economic times and environments in a recession can leave property owners questioning the future of their investments. However, experts agree that multifamily properties provide investors with a hedge against inflation. But how you react as an owner of a multifamily property during a recession will involve many factors and depend on your unique circumstances.

During a recession, employment drops. With less disposable income, people are spending less, which also means businesses are earning less. When inflation contributes to a recession, people turn to stricter budgets and cut back on unnecessary spending.

Not only can fewer people afford to buy a new house but prices of home ownership go up. Home costs are high due to the increased costs of construction. Construction is more expensive during a recession due to the rising cost of raw materials. During this period, the industrial sector slows its production, leading to a decline in manufacturing activities.

While demand for multifamily cools, limited multifamily construction due to the increased cost of construction will help sustain the sector. Low unemployment also helps sustain the demand for multifamily as affordability issues force people to rent rather than buy.

Should I increase the rent on my multifamily property?

In a recession, rents can go up and down and depend on the location of the rental property and how hard the local economy was hit. In areas that experience massive job losses, you’ll see an increase in vacancies as people can’t afford their rent and leave to relocate. Property owners may be forced to reduce their rent to avoid long periods with many vacancies.

The decision to increase the rent during a recession ultimately depends on your property’s performance. You may have tenants that lose their jobs, cannot afford to pay their rent, and have no choice but to leave. With many tenants leaving, you may be left with many vacancies, which you may find challenging to fill. To attract new tenants, you may choose to lower your rent to appeal to renters working with stricter budgets.

On the other hand, you may have reliable tenants who have not been drastically impacted by the recession. While the rental income may be stable, other circumstances may pressure you to increase rent so that you have protection during the recession. You may also increase your rent to recover from delinquencies.

In conclusion, the pressure to raise the rent on your multifamily property will involve many factors. The Federal Reserve is committed to fighting inflation. And one of the ways that the Fed combats rising prices, including rising rent, is to increase interest rates. Therefore, real estate owners who increase their rent are technically contributing to rising interest rates. Increasing interest rates means more expensive mortgages, making it harder for people to afford homes – which has a positive impact on investors with existing real estate property.

For more information on how economic trends may impact your investment, whether multi-family, or other commercial real estate asset types, please reach out to info@cbicommercial.com