One of the most frequently asked questions today in the real estate investing space is whether it’s smart to buy in the midst of a recession. At a high level, there are two general philosophies that can be used to dictate your strategy. The first school of thought is you should be investing today when everyone has exited the playing field and “running away”. The second school of thought is more conservative and basically trends along of the lines of it’s too risky right now and the market has not bottomed out.
If you’re more of the second school of thought, then this article by no means is going to be trying to convince you otherwise. This is a complicated topic that requires not only a global markets analysis but also a refinement of each individual’s investment thesis. Now, if you’re more of an opportunist and see the potential to make strong moves in the midst of uncertainty, the question bodes what kind of opportunity you chase.
Since there is so much uncertainty in the markets, if you’re going to be deploying capital, I believe there needs to be some degree of stability baked into the investment. Thus, chasing lower-tier classes of markets or assets that inherently have more risk tied to them I think should be off the table. The less desirable markets and assets may have more risk of continuing to bottom out and have continued cap rate decompression.
On the other hand, attacking highly desirable markets and assets could provide the stability needed to counteract market risk. These sorts of investments are more likely to be anchored by strong fundamentals that are less impacted by any continued financial market issues. Now, it wouldn’t make sense to deploy capital with this uncertainty unless there is discount or value that could be attained. Many of these markets and assets, including my primary target market of Boston, have already adjusted by about ~10-15% on pricing since the beginning of interest rate hikes and recession woes.
Here’s an example from my own investments in the Boston market, which I consider to be a top tier market in the US. Today, I’m still actively continuing to look and buy multifamily assets. My search for the most part if focused on only top tier locations that will continue to remain attractive well into the future. Assets in these locations I believe will continue to trade at similar cap rates in the future without too much risk for decompression as they are incredibly desirable. Yet, we’re able to get significant discounts to last year’s pricing as pricing stabilization has started to make its way across the city.
So, the takeaway for any investor right now considering deploying capital right now is this; price adjustments are already very much in motion in many markets, and there is a real opportunity to get good sized discounts. However, make sure through the investment you’re not taking on any unnecessary market risk, as the less stable markets and assets are the ones that may be the most prone to the impacts of the recession.
