Many wise investors recognize that prices often drop during a recession. If you’re hoping to buy the next time apartment prices slip, buy a 2030 calendar and get ready. Within the next decade we will probably have another recession.
By the way, did you write any offers during the depths of this recession?
In March, April, and May of 2020 apartment values dropped 3 to 5%. I hope you bought several buildings. 10 San Diego County multi-family properties may have sold below their 2019 value.
That was then. Now apartments are selling about 5% above what they sold for in 2020 and more than 10% above 2019. This recession had a short and trivial effect on apartment values.
That’s amazing. Remember the government mandated that rental owners become the lenders of first resort. The Center for Disease Control mandated a temporary moratorium on evictions. The State of California, several counties, and many cities prohibited rental owners from evicting tenants for nonpayment. Despite all that, apartment values rose.
What caused the demand to buy apartments? Two economic truths: supply and demand and low interest rates.
San Diego County has a 100,000 rental unit shortage. If we doubled our apartment construction for a decade, San Diego County still would not have enough rentals for the people who want to live here. Government policies (mostly high fees, insistence on more parking, and down zoning) created the rental housing shortage. Building tens of thousands of apartments or exporting more than 20% of our renters could bring the market back in balance.
For rental owners, this recession has been milder than the Great Recession of last decade. In the early 1990s the Resolution Trust Corporation closed thousands of banks nationally. Tens of thousands of homes, condos, and apartments were foreclosed. General Dynamics left San Diego, Home Savings was taken over, and San Diego Cunty lost almost 10,000 rental households.
Now San Diego County’s economy is bigger and more diversified. A recession would have to be about five times as bad as the 1990s to shrink tenant demand to the number of available rentals. We’d call that a depression. What investments do well in a depression?
The second major factor causing a demand to own rentals is the lowest interest rate in our lifetime. Home loans, car loans, and apartment loans are cheap. Apartments earn between 4-5% of their value. Investors can borrow at less than 4%. In other words, apartment properties generate a higher yield than the bank’s interest rate. The cheapest interest rates in our lifetime mean bank interest is finally lower than the return on local rentals.
Owning San Diego County rentals is great. It’s expensive to be a tenant in San Diego County. You can live for less in 40 other states, but without surf or mountains within an hour. People who can tolerate winter temperatures below zero, summer temperatures over 100 degrees, or humidity over 80% can find cheaper housing. Not everybody can afford to live in paradise.
Safer investments sell for more than riskier investments. Investors, maybe I should say speculators, can acquire rentals in Detroit for less than 10% of San Diego’s cost. Remember Detroit has a job shortage which has created a people shortage. Detroit is bulldozing buildings because the city cannot provide services to them.
Last spring, when the world was panicked about COVID, there was a brief San Diego County apartment building sale. Now, the panic is over. Millions are vaccinated each week. San Diego apartments are selling for 5% more than 2020. We’re still not building as many apartments and condos as we need for new households. Next year the rental housing shortage will be more severe.
How many years will you keep your money in the bank waiting for another apartment sale?
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Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”