As high inflation persists despite the Federal Reserve’s attempt to rein in rising prices, many market experts expect a recession ahead — including Al Brooks, Head of JPMorgan Chase Commercial Real Estate.
But while recessions can be painful, the multifamily sector is resilient and savvy investors understand how to ride the market’s ups and downs.“We have this saying: There are people who are victims of the cycle, and there are people who take advantage of the cycle. We bank the second,” says Brooks, a multifamily investor who has been working in commercial real estate since the early 1980s. In his role at JPMorgan Chase, he oversees the largest multifamily loan portfolio in the nation.
He spoke with Story about his outlook on the market and offered tips on how multifamily investors can prepare for a downturn.
Bracing for a ‘mild to moderate’ recession
The Fed sees high inflation as a threat and has been raising interest rates to slow price growth back to their long-term target of 2%. But slowing stubborn price increases without triggering a recession is a tough needle to thread.
“I’ve never seen the Fed be able to pull this off. I’d love it if they did — we stomp out inflation and land it perfectly,” he says. “But it’s a pretty complex economy in the U.S.”
However, assuming a recession does hit, it likely won’t be an “ugly” one, Brooks says.
Consumer balance sheets are the strongest they’ve been in years. That makes inflation tough to tame, but it should keep any downturn in the mild to moderate range, he says. Consistently high employment will help too.
Successfully riding the economic cycle
How can you take advantage of the economic cycle, rather than becoming a victim of it? Here are Brooks’ tips:
1. Avoid excess debt
When the market is trending up, it’s easy to believe that taking on more debt to buy more units is the right call. That changes when a correction looms, bringing a risk of falling rents and property values.
“In a rising tide, there is no amount of leverage that’s going to hurt you. But it’s a two-edged sword, and when it goes the wrong way, it buries you,” Brooks says.
When a downturn appears likely, he advises investors consider whether the cash flow their properties generate is sufficient for the amount of leverage they’re carrying and to ensure their buildings are well-maintained and competitively priced.
“The big thing is you don’t want to have to sell at the low point,” he says. Not only could the property’s value have dropped, but an investor loses the cash flow it generates.
2. Prepare to seize investing opportunities
Another downside to carrying too much debt: It limits an investor’s ability to take advantage of deals that may emerge in an ugly market. Savvy investors make sure they and their partners have sufficient liquid assets or a line of credit to draw on when a well-priced property becomes available, Brooks says.
Even in a mild recession that doesn’t send property values crashing, they’re likely to dip from the market’s peak, Brooks says.
“You get people who capitulate because they overdid it, and now they’re super negative on the market,” he says. “You’ll hear people saying, ‘I don’t know if it’s ever coming back, it’s never going to be like the old days.’ That’s exactly when you want to buy.”
3. Don’t wait for the perfect moment to invest
It’s impossible to predict exactly when the market will hit bottom, so trying to time deals perfectly — while tempting — can be short-sighted, Brooks says. Stay focused on how potential investments fit into your long-term strategy.
“Maybe you don’t catch the bottom and it goes down for another year or two. Who cares?” Brooks says.
If you can find a property that’s a good fit for your portfolio with a price and potential rate of return unheard of in stronger economic times, don’t wait.
“Call it a win and don’t whine about it if it turns out you could have gotten it a little lower if you’d waited,” he says. “I’ll never be able to tell you exactly when the market hits bottom. I’ll tell you this, though: In 20 years, you’ll be super happy that you own that property at that number.”
4. Interest rates may not return to last year’s lows
As the Fed has raised its key interest rate, mortgage and commercial loan rates have been rising too.
That doesn’t mean investors should put off deals and wait for rates to drop.
“I think one thing we need to be realistic about is that I don’t know if the government can keep pumping liquidity into the economy, and that’s a lot of what got us down to those low rates,” Brooks says.
While he doesn’t expect a return to double-digit rates seen in the 1980s, rates may not drop to last year’s rock-bottom levels, either
Recession may be painful, but necessary to halt inflation
While some in the commercial real estate industry feel the Fed raised rates too aggressively, letting inflation rise unchecked is more dangerous, Brooks says.
“I’d rather take the medicine, and part of it is because I remember what it’s like trying to plan with high inflation,” he says.
That was during the 1970s, when stagflation — fast-rising prices and sluggish economic growth — set in.
“That’s why we have to stomp on this,” he says, calling the combination of high inflation, rising unemployment and recession “the worst of all worlds.”
Multifamily investing still makes good business sense
Compared with other types of commercial real estate, like the office sector, multifamily has some built-in protections that shield it from the effects of recession.
In fact, the multifamily market hasn’t seen a major correction since the 1980s, when many cities saw a building boom, Brooks says. The correction happened because recession coincided with overbuilding, but that’s not the case today, he says.
Apartments — particularly class B and C properties offering good value to tenants in desirable locations — remain in demand and continue generating cash flow even during an economic downturn, Brooks says. “I feel really good about that business.”
Property values and rents may fall, but they bounce back as the economic cycle swings back toward growth.
Another strength: Inflation isn’t as big of an enemy for apartment owners as certain other businesses, Brooks says. Once an investor purchases a building, that cost is fixed. Operational costs may rise, but some, such as utility bills, are often passed on to tenants.
It’s a different story for developers planning new buildings. Trying to structure deals for projects that will take years to complete amid uncertainty about how prices and interest rates will change is a significant challenge, Brooks says.
While rates are up, Brooks says his team continues to make loans.
“I’m proud of our customers. They understand this business is cyclical, that every day isn’t better than the last, and they’re prepared. The reason it all works is we bank great operators,” he says.
By the editorial team at Story by J.P. Morgan
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