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Uncertainty: why it doesn’t need to slow down your portfolio growth

Uncertainty: why it doesn’t need to slow down your portfolio growth

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If we have learned anything from the COVID-19 pandemic, it is that uncertainty is the only truly certain thing.  For those looking to invest, 2020 has been a stark reminder of the importance of diversification – one of the best ways to protect your overall portfolio.

Historically, economic downturns have translated to increased investment activity in the real estate market. At present, demographic behavior both during and pre-pandemic points to multifamily properties as the go-to real estate investment for people looking to move toward more steadfast opportunities in uncertain times. Multifamily assets have proven resilient during downturns and provide steady income and asset appreciation.

Even before the world was turned on its side by a pandemic, homeownership levels were low compared to previous years.  The high costs of homeownership, the limited inventory of affordable single-family homes, and the millennial generation’s preference for rental housing were the main contributors to the trend, according to this 2020 North American Investment Forecast.

Millennials were already moving to the suburbs looking for more space and affordability as they matured, married, and had children, a migration pattern that accelerated as people moved away from densely populated cities to escape COVID-19.  Since many workers are telecommuting, they can look beyond the urban areas where their offices are located.

The rental delinquency fear proved wrong

Although there were some concerns that delinquent rent payments would increase due to the pandemic, thus far, they have remained steady, according to the National Multifamily Housing Council.

And, while rents in urban areas have plummeted since the start of the pandemic, rent prices in suburban areas have either remained stable or increased, according to research from the Apartment List, which analyzes both data collected by the Census Bureau as well as internal data from apartment listings.

Multifamily offers strong risk-adjusted returns during downturns

There is very little correlation between real estate and stock market volatility. As we saw at the beginning of the pandemic, the stock market can get spooked into a freefall.  Real estate prices, on the other hand, remained steady thus showing their value as a diversification vehicle.

The chart below shows the 20 worst quarters for 60% stock/40% bond portfolio returns between 1978 and 2012, compared to returns of commercial real estate open-end funds from those same quarters.

Source: NCREIF, Barclays Capital, Wilshire, J.P. Morgan Asset Management

In uncertain times such as these, thoughtful investors look to lower risks while still achieving their investment goals, and multifamily real estate investing is one of the surest means of accomplishing this strategy, because it offers steady long-term income with very little volatility.

The advantage multifamily has over single-family rentals is that there is a smaller impact when the occasional collection issue arises. Also, tenants living in carefully screened multifamily apartment complexes are highly motivated to keep paying their rent, making it a much more reliable source of income to investors.

In terms of the best performing markets, 70% of the U.S.’s fastest growing cities in the last four years are in the Sunbelt, where acquisition costs tend to be lower. Businesses and individuals are drawn to these areas due to tax advantages.  U.S. and multinational companies that have seen the supply chain disadvantages to having factories worldwide will look to move manufacturing to locations in the Southeast like Florida and Texas that offer tax incentives.

There is no better time than right now to redeploy some of your stock and bond market assets to multifamily real estate investments.  The continued impact of COVID-19 on our lives and the economy remains unknown, but carefully selected real-estate investments have the ability to add stability and a source of steady income to your portfolio even in uncertain times.