"Recession Proof" Assets
Who wouldn't want to add some "recession proof" assets to their investment portfolio? Especially income-producing assets that are also a fantastic hedge against longer term rising inflation - but which also benefit from the low interest rate environment we are currently enjoying!
Class B/C apartment buildings: sometimes called "affordable living units" or "workforce housing" or "working class buildings" - good old townhouse style garden apartments - are almost impossible to resist. Almost no new inventory (check), rising demand due to demographic changes (check), long term tenants with low turnover (check), a tenant base that includes many with incomes and assistance that are tied to COLA adjustments (check), more attractive purchase prices than newer, Class A buildings (check).
We were reviewing some recent vacancy data that highlighted the difference between Class B/C vacancies (dropping) as opposed to Class A (which are rising), and we came across this piece from a couple months ago from Bloomberg: the headline is that vacancies are starting to rise in the multifamily space, but not in the Class B and C properties, which are bucking that trend. Vacancies there are dropping as there continues to be a lack of new supply and strong demographics that favor the sector.
Are these truly "recession-proof"? There are some pretty strong arguments that point to that, and as long as we can find well managed assets at a cap-rate in the 7.50 to 8.50 range, we will keep on buying!
From the article:
At Class B and C properties combined, vacancies dropped to 3.2 percent in the third quarter of 2015, having fallen steadily from 4.3 percent in three years, while Class A vacancies climbed to 5.7 percent from 4.6 percent during the same period. Reis plans to announce the fourth-quarter breakdown later this month. Apartment vacancies nationally have been hovering near their lowest since 2001 for the past three years.
Relatively low total vacancies are “masking some significant differences in class,” Severino said. “Class B and C vacancy continues to fall with every subsequent quarter. Class A vacancy bottomed out in the first quarter of 2013 and it’s been slowly rising since then.”
Some big investors have been exploiting the gap, buying and renovating Class B apartment buildings across the country. Blackstone Group LP, the world’s biggest private equity firm, has invested about $14 billion in older apartments in the past three years, while Starwood Capital Group in October agreed to pay $5.4 billion for a group of mostly suburban buildings in areas including South Florida and Denver. The seller is Equity Residential, the biggest U.S. apartment landlord.
“They’ve swarmed over the apartment space, particularly the Class B workforce space,” said Robert Hart, chief executive officer of TruAmerica Multifamily, a Los Angeles-based investment firm that he founded in 2013 with Guardian Life Insurance Co. of America. “It has the most durable cash flow. It’s the most recession-proof and it’s not as susceptible to increases in supply.”
TruAmerica acquired about $1.8 billion of apartment buildings last year, Hart said. About three-quarters of those are Class B properties, which the company has been buying for a capitalization rate of about 5.5 percent, according to Hart. Class B apartment buildings typically offer a cap rate -- a measure of investment yield used in real estate -- about 1 percentage point higher than Class A properties, which are typically less than a decade old, he said.