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Navigating Investments in Uncertain Times

by | Oct 3, 2023 | 0 comments

Having worked with accredited investors for over 25 years, as a Financial Relationship Manager at Bank of America, a product development professional at AIG, and a multifamily syndicator, I have seen my share of uncertain economic times and how such times impact various investments. It can be unnerving when economic conditions seem to deteriorate suddenly. When multiple areas of the economy shift in tandem, it becomes challenging to understand how economic changes may impact your current investments’ values, and to confidently make decisions about your financial goals for the future and financial stability for today.

More than any other questions we receive, our investor are regularly asking:

  1. What is happening in the economy and where is it headed?
  2. Where should I put my money today?
  3. Are multifamily syndications still a good and safe investment?

Space does not allow for a discussion of all the factors to consider in answering these questions. I am not a financial advisor, and as such this is not financial advice.

Changing Economic Cycles 

With that said, here are a few things to consider as you try to answer these questions and make your own decisions in consultation with your financial advisors.

  1. Economies go in both short term (cyclical) and long term (secular) economic business or debt cycles. Since the Great Depression in 1929, there have been 14 short term business cycles. While they can be shorter or longer, the typical business cycle lasts 7 to 8 years from peak to trough, with recession lasting 10-18 months, recovery lasting another 18 months, and an expansion lasting 3 to 4 years before beginning another contraction.

  2. The typical business cycle has a period of expansion driven by stimulative fiscal and monetary policy, following an economic contraction. Low interest rates and expanding money supply, as well as tax incentives post-recession, induce citizens to shift from saving to investing in sectors that fuel an economic recovery. This recovery period leads to a period of expansion in which incomes and asset values rise to create a positive wealth effect. This not only raises asset prices, but also expands liabilities, as investors borrow cheap money to invest in assets for a spread. Eventually asset prices rise to the point where the income generated by such assets no longer supports the underlying debt service payments.  Risk premiums for investments fall, supply and demand become unbalanced, inflation often rises across the economy, and growth is no longer sustainable. This begins the contraction phase of business cycle. Fiscal and monetary policy tighten to slow the economy, interest rates and debt payments rise and defaults begin. Credit markets tighten as incomes and asset values start to fall, people shift from investing to saving, and this often culminates in a recession at the bottom of the cycle.

  3. While it is impossible to time peak and trough of the business cycle, we can see patterns repeat and make moves consistent with our investment goals, to protect and/or grow our investments through these shifts. Those who think “it is different this time”, or let fear of the unknown keep them from making any moves, are hit hardest when the business cycle shifts. Those who look at the big picture and move to protect and grow wealth and incomes through each phase of the business cycle, usually end up in a much better financial position.

  4. All assets (equities, debt/bonds, gold, real estate, etc.) are impacted by shifts in the business cycle, interest rates, and other monetary and fiscal policy (money supply, tax rates & incentives, etc.). As investors weigh the “risk free” rate of a US Treasury, the risk premium they demand for taking on more risk to create greater returns will change. The key is to understand how shifts in the economy create risk in each asset class, identify how such risks will impact incomes and values, and make moves to mitigate such risk while taking advantage of the opportunity to create future returns during or after the next phase(s) in the cycle.

  5. Warren Buffet has a few principles worth repeating. Rule #1: Never lose money. Rule #2: Be fearful when others are greedy (at the top) and be greedy when others are fearful (at the bottom). This is worth heeding.

Important Investment Considerations 

Now that we have reviewed the business cycle, I want to give my opinion on a few things to consider as you decide whether and how to make changes to your investment portfolio.

  1. First, it is not wise to invest in what you do not understand sufficiently enough to know how changes in the market cycle could impact returns.

  2. When heading toward a contraction, it is wise to protect what you cannot afford to lose, and to keep enough funds liquid for you to sustain your lifestyle for 12 months.

  3. Understand that money is made at the bottom when prices fall below their fundamental values. While many are too afraid to invest, the trough of the cycle provides tremendous opportunities to buy assets “on sale” which have a strong potential for growth through the next expansion period.

  4. It is impossible for even seasoned economists, policymakers, and operators to know exactly how asset prices and earnings will be impacted by each contraction. Our financial system is complex and multiple pins can prick the proverbial asset bubbles at the top of a cycle, revealing risks yet unknown. It is wise to consider diversifying investments so that your risks and returns are spread across asset classes in a contracting economy. This is especially important when growth is slow, while at the same time both risk and inflation are elevated.

  5. Look at asset classes that are fundamentally resilient during contractions, which individuals and businesses prioritize what they need, and pull back on spending on discretionary goods and services. Assets which create value and income by providing necessities like housing, food, energy, and transportation tend to be more resilient during a downturn, and faster to rebound during the recovery and growth periods of the next cycle.

  6. Consider Investing with companies whose leaders have experience navigating their businesses through economic contractions. They will better understand the risks to their business inherent in economic shifts, how to mitigate risk to protect value, cut expenses, increase incomes, and take advantages of opportunities to make purchases primed for growth through the next expansion.

  7. Consider investing in areas of the country which are resilient to recessions, have a strong, diverse employment base, strong wages, low cost of living, great schools, and low crime. Having a customer base whose incomes are higher than average and with multiple job options is critical to the success of any business during a downturn.

  8. Keep a long-term perspective. You may have to hold assets longer than you would in an expanding economy, but investments which remain resilient during a downturn generally rise in value when the economy expands again, hopefully within a few years.

  9. Look at your tax situation, and for investments which provide tax incentives, credits, and deductions you may be able to use to offset your income. For example, there are significant tax incentives for developing multifamily properties according to energy efficiency and prevailing wages standards.

Multifamily Investments in Uncertain Times

When it comes to investing in Multifamily apartment buildings, both existing and new development, we take seriously how values and incomes are impacted during both expansions and contractions. Anna and her partners have successfully navigated multiple economic cycles. While there are risks, there are also tremendous opportunities ahead for those ready and able to capitalize on them. We are focused on identifying and mitigating risks that can impact values, including reviewing KPIs daily to monitor our assets and make corrections as needed. From the type of debt we use, to reviewing the factors impacting revenues, we are proactively positioning our assets to weather a contraction and for continued growth.

Greater Purpose Capital invests in multifamily projects in strong, resilient local markets, where the demand for housing is well above supply, incomes are high, employment opportunities are diverse, and expenses are reasonable. Class A and Class B multifamily assets have been one of the most resilient asset classes during recessions. As a historic “flight to safety” asset, Class A and B+ multifamily assets have had cap rates fall in prior recessions, even as they rise in other asset classes. While we expect volatility, quality multifamily asset values have historically been quick to recover any short-term value declines on the other side of recession. Given its resilience in the past, and the fundamental need for quality housing in a time where homeownership affordability is at an all-time low, we are optimistic about both the short-term resilience and the long-term outlook of Class A to B+ multifamily. We are committed to finding and creating quality opportunities for our investors to consider as part of a well-diversified portfolio.

Live with Purpose,

Anna Kelley


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