RECESSION PERFORMANCE: STOCK MARKET VS. MULTIFAMILY REAL ESTATE

[Jorge Abreu]

Ultimately, stock investing simply can’t surpass multifamily investments when it comes to cash flow. While there may be a select few companies that pay comparable quarterly or monthly dividends to shareholders, they come with much more risk than a solid multifamily investment.

And with real estate, cash flow can be even more critical during market corrections. Bad timing in a turbulent stock market can set you back for years before breaking even, and if you happen to need to sell some stocks during a market correction to pay bills, that can be very destabilizing…both financially and psychologically. Even during times of turbulence, multifamily real estate has little correlation to the stock market, meaning that it can easily help you weather a temporary recession

RECESSION PERFORMANCE: STOCK MARKET VS. MULTIFAMILY REAL ESTATE

👉 On average, the stock market sees 6–8% in annual growth.

👉 Multifamily is more in the range of 15-20%.

Historically speaking, the real estate sector has outperformed the stock market. To further prove this point, let’s examine two very significant times in history: the 2008 financial crisis and the 2020 global pandemic.

THE STOCK MARKET CRASHES OF 2008 & 2020

The stock market crashed on Sept. 29, 2008, and The Dow Jones Industrial Average fell 777.68 points. Prior to the stock market crash of 2020, it was the largest point drop in history. By March 5, 2009, it had dropped more than 50% to 6,594.44. While it fell 90% during the Great Depression, that was a downward slope that took place over almost four years’ time. The 2008 crash only took 18 months.

Over a single year, the stock market tanked $6.9 trillion of shareholder wealth.

And investors felt those harsh ripple effects for more than four years. The Dow dropped 275 points in June 2012; then the 10-year benchmark Treasury yield dropped to 1.47.36—the lowest rate in more than 200 years. It wasn’t until 2013 that the stock market finally recovered, yet inflation-related fears and higher interest rates sent the Dow into the longest correction since 1961. After 10 full years of volatility, the correction ended in August 2018.

Then, the global COVID-19 pandemic joined the chat, and the stock market magnificently crashed yet again. As government officials around the world shut down economic activity, panic and uncertainty ensued, resulting in a stock market crash that included the three worst point drops in our country’s history.

March 9, 2020:

The Dow fell 2,014 points, a 7.79% drop

March 12, 2020:

The Dow fell 2,352 points to close at 21,200, a 9.99% drop and the sixth-worst percentage drop in history

March 16, 2020:

The Dow plummeted nearly 3,000 points to close at 20,188, losing 12.9%. This price drop was so significant that the New York Stock Exchange suspended trading several times during those days.

However, unlike the 2008 crash, the stock market rebounded back by May of 2020, largely in thanks to an enormous amount of stimulus money and slashed interest rates.

The stock market crash of 2008 was spurred by defaults on consolidated mortgage-backed securities, which were directly tied to the loans banks were handing over to potential homebuyers regardless of their creditworthiness. When the housing market fell, many homeowners came up short on their loans. U.S. homeowners lost a cumulative $3.3 trillion in home equity during 2008, according to a report from Zillow.

As a result, many families were forced to downsize and relocate to single-family rentals and multifamily housing. During this time, stock market–correlated real estate investment trusts (REITs) experienced the same market volatility, but they recovered much faster. Apartment REITs outpaced other commercial real estate sector and the S&P 500 in the subsequent years following the 2008 recession.

2020 was, as we’ve all heard, an unprecedented time. But between stay-at-home orders, the move to remote work, and generous stimulus checks, the multifamily sector was incredibly well-positioned to withstand any market hits. And despite rumors of rent strikes and nonpayments stemming from lay-offs, rent collections remained relatively stable throughout 2020, with razor-thin decreases compared to 2019.

MULTIFAMILY’S UNMATCHED RECESSION RESILIENCY

Discretionary spending is largely cut during recessions; saving cash and budgeting for necessities becomes the priority. So while real estate sectors like retail and hospitality often see adverse effects, multifamily real estate goes largely unscathed. To state the obvious: people will always need a place to live. As the need for apartments increase, rents increase as well— it’s just simple supply and demand. This bodes well for multifamily investors. Additionally, multifamily buildings typically have more renters than retail and office properties, therefore, a handful of vacancies won’t significantly impact the bottom line. And with short-term leases, owners can swiftly react to any economic shifts.