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Updated over 8 years ago,
How do different property classes perform in a downturn?
Looking for input from those who have actually owned multifamily property during a downturn in the market. I've heard a lot of theories about how different classes are affected by changes in the market. We typically buy C class stuff, and I constantly hear discussions about how C class won't be affected by all the new construction, because "they're not building anymore of those," or "where do you think everyone has to move when jobs go away," and any number of other conversations. The flip side is that as A class overbuilds, they drop their rents, and B tenants are able to move up a class, and the trickle down effect hurts everyone.
I'm in the DFW area, and even though we didn't get hurt as badly as other areas, when I look at the data, there was definitely a drop in rent growth and occupancy during 08 and 09. It wasn't terrible, but it was there. As a result, I always stress test my numbers for a drop in performance. I'm looking at a deal that is in an A or maybe even A+ area, and wonder if it needs to be stressed to a greater degree than the usual C class deals, or stressed less because its such a good location. To be more specific, this is NOT a new construction, super nice, $2000/month property like we have popping up on EVERY corner in DFW. It is an old, but desirable property in a great area. Its rents are significantly below the newer stuff, so I think we have a cushion there. I do know that the property will always have a lot of people wanting to lease, I just don't know how hard to stress the rents in this situation.
I know there's no concrete answer to this question, but hoping someone with a lot of experience (hello @Brian Burke!) can provide some direct experience.