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In commercial real estate, the ability to seize opportunities even during the challenging recessionary phases of the market sets the best apart from the rest. As an investment advisor who assists your clients with multifamily investment opportunities, you understand that the late-cycle market conditions can make it difficult to buy suitable investment properties. Identifying, underwriting, and acquiring multifamily properties during a downturn requires expertise and a well-thought-out strategy.

In this blog post, we’ll look at some of the challenges that emerge when seeking multifamily investments during a recession and explore the tactics investment managers use to still secure properties that provide opportunities to enhance value for investors. Those challenges–and manager tactics– occur in three essential areas of the investment process:

Property Identification

The first challenge investment managers face in a recessionary phase of the commercial real estate cycle is identifying viable multifamily investment opportunities. Wide spreads between bid and ask prices may limit the number of available properties until pricing converges. And the distressed or foreclosed properties that are available may not meet the manager’s investment criteria. To help circumvent these identification challenges, premier investment managers use a combination of tactics:

  • Market Research: Investment managers can invest heavily in understanding market trends and economic indicators. Comprehensive analysis of job growth, population dynamics, and demand for rental properties becomes increasingly important during the recession phase in helping them identify areas with potential resilience.
  • Local Expertise: Experienced managers often have a network of local brokers who not only provide invaluable insights into specific locations but they often uncover off-market investment properties that a reputable manager can pursue on a negotiated basis. 
  • Distressed or Foreclosed Property Screening: Not all distressed or foreclosed multifamily properties are worth pursuing. But for investment managers pursuing multifamily core plus or value add strategies, these properties present opportunities to acquire desirable assets at well below market rates.

Underwriting 

Once potential properties are identified, the next challenge is underwriting. In a recession, it becomes more critical than ever to ensure that the investment aligns with the investment manager’s strategy and investment objectives. Here's how managers can approach underwriting in the late stages of the cycle:

  • Conservative Assumptions: Managers should adopt more conservative financial assumptions, factoring in potential rent decreases and extended periods of higher vacancy. This helps ensure the manager and the investment can weather the storm and still achieve desired returns.
  • Stress Testing: The most seasoned managers will stress test their underwriting models under various recession scenarios. This helps them assess the property's resilience and adaptability to market fluctuations.

Acquisition

Acquiring properties in a recession can be particularly challenging due to financing constraints and increased competition. And high interest rates and an evolving landscape for securing debt don’t make the process any easier. Here are a few ways well-capitalized multifamily investment managers help overcome these hurdles:

  • Capital Reserves: Investment managers with long track records typically maintain significant capital reserves to seize opportunities quickly when they arise. Having cash on hand allows them to negotiate favorable terms and close deals faster than firms that are not in the same financial position.
  • Leveraging Relationships: Strong relationships with lenders, brokers, and other stakeholders are invaluable during a recession. Top managers leverage their network of trusted partners who can often provide alternative sources of financing or access to off-market deals.
  • Creative Financing: Managers can explore creative financing options, and likely will need to do so in a high interest rate environment where back lenders are pulling back to shore up their balance Sheets. Alternative sources of financing include joint ventures, GSEs, insurance companies, debt funds, and mortgage REITs. Having a stable of additional sources of financing is essential when traditional sources may be scarce or expensive.
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Conclusion

In the challenging environment of a recessionary commercial real estate market, the best multifamily real estate investment managers find opportunities to shine. They combine rigorous market research, conservative underwriting, and strategic acquisition tactics to identify, underwrite, and acquire multifamily properties that can withstand the difficulties of economic downturns.

As an investment advisor, you can share these insights with your clients who invest in commercial real estate, reinforcing the trust they have placed in you by recognizing you have their best interests in mind, even during late-stage phases of the commercial real estate cycle. 

We encourage you to download our eBook, Anatomy of a Private Real Estate Deal, for additional insights.

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