The 3 Elephants in the Room – Part 3 – RECESSION
We're back for part 3 of our series "The 3 Elephants in the Room" ... Inflation, Interest Rates, & Recession.
If you missed series 1 & 2, check them out here...
In this newsletter, we will be discussing...
ELEPHANT #3
Depending on what expert you listen to, we are either in a recession or heading into one. But the consensus is...that it will happen.
What is a recession?
In basic terms, a recession is when the economy's performance decreases for several months, marked by a decline in the total value of goods & services (known as GDP), higher unemployment rates, and lower consumer spending.
Many strategists believe a recession will be short & shallow. One big indicator for this, is the US unemployment rate. It is currently at 3.7%. There are currently 1.7 job openings for every unemployed person. And we just added over 260k job last month.
Let's take a look at the graph below. It shows the fed funds interest rate (blue line running across) and periods of recession (grey areas running vertically).
What does this graph tell us?...
- Look at the grey shaded areas. These are recessions. During these periods, the Fed lowers interest rates (blue lines) to bring the economy out of the recession.
- Every recession finishes with lower interest rates.
- The Fed is walking a very fine line in it's efforts to kill high inflation and avoiding a recession.
- Most experts believe the Fed will crush inflation. However, it will be at the expense of the economy, causing a recession.
- From 1945 to 2020, the average recession lasted about 11 months. Many experts and leading economists are suggesting a short and mild recession. Check out this quick video from an expert in the commercial real estate space...
Recession Impact on Multifamily Development & How We Mitigate Risk:
- Depending on how deep and long lasting a recession, the economy will slow down, see higher unemployment rates and lower consumer spending. This could increase apartment vacancies, concessions, & delinquencies.
- However, because the average recession lasts 11 months, a recession even lasting 24 months may have little impact on multifamily development projects. Why is that? We have two projects that will break ground in early 2023. Since the entire process from land acquisition to building completion typically takes 24 to 30 months, our projects should be clear of any recessionary environment (based on historical data).
- During a recession, development projects slow down (especially single-family dev). But this presents an opportunity for the experienced developer to negotiate better pricing on land, building costs, & labor.
Our approach to investing is to have a healthy concern of the economic conditions, but to make decisions based on data. We use historical trends, macro & micro market research, along with our experience & confidence in the multifamily space.
If you are looking for a Recession Resistant investment & a team with a track record, check out our latest opportunity!!!
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