As BAM founder and CEO, Ivan Barratt, has said, “winter always comes” to the market – what then is the next logical question? The question that seems to be popping up in many finance and investment conversations is when the downturn is coming: because as Ivan notes, it always does. According to a recently published report on the Yardi® Matrix site, nailing down the arrival of the next economic downturn may be difficult, but the factors that may contribute to that downturn are visible to those looking. We review the Yardi report and share some of the factors that could hasten the inevitable economic winter in today’s BAM blog…

According to the Yardi paper, although we may technically be due for a downturn, the traditional factors that precede one aren’t exactly heralding the next recession’s arrival. Elements like high oil prices, consumer debt, and commercial mortgage lending may historically be part of an economic winter; however, all are somewhat modulated – oil prices aren’t close to record highs, consumer debt is high but debt-to-income ratios are healthy, and commercial mortgage lending has lending levers which seem okay. The report notes that other things like the stock market and concerns about trade policy have caused some anxiety; yet when corporate profits are so high, it’s hard to predict when the market will turn bearish. According to the report, 2020 is possibly the earliest to expect a downturn and they admit that even that may be rushing things. They note that both American and global GDP is expected to hit a high of 3% this year, and drop only slightly by 2019. With a healthy employment outlook, pushing an economic winter back to 2020 may indeed feel too soon.

Yet, there are clouds on the horizon that may combine to bring the winter weather. The Yardi report names some of these factors, which we’ve listed here:

Immigration/construction: It should come as no surprise and no report needed for those in the multifamily industry to know that we face a major shortage of skilled labor, which is seriously impacting development. Yardi notes that policies hard on immigration may also be hard on the skilled trades, when developers most need skilled workers to keep up with multifamily demand.

Yield curve: The yield curve has been watched more closely than many football games in recent months – the reason being that an inverted yield curve has preceded many past recessions. One concern is that the short-term interest rate will rise above the 10-year Treasury rate, resulting in an inverted yield curve.

Rising Interest Rates: As we’ve noted in previous articles, the Fed hasn’t been shy about discussing the plans for interest rates. They’re trying to prevent inflation from rising above the 2% target level but are afraid to cut growth off. Yardi notes that for real estate, rising rates such as growth at the 10-year Treasury will increase the cost of permanent debt financing and also reduce the premium between debt costs and acquisition yields.

Tariffs: Although the current tariffs have had a minor affect so far, the tariffs and trade disputes have increased costs on some consumer goods, autos, and more. Tariffs may also play a stronger role in development, as raw material becomes more costly. Yardi notes that although the effects haven’t been majorly felt so far, an increasingly aggressive trade war could have a more serious overall economic effect.

While there may be plenty of food for thought, that doesn’t mean it has to give the multifamily sector indigestion. Despite some areas of concern for the overall economic weather, there is expected to be a consistent demand in multifamily housing, as new-home construction hasn’t kept pace and as more young people enter the workplace. Sectors like retail and office may not face such sunny skies, as retail faces the realities of online shopping competition and office is using less space as well as remote work. Yardi advises investors to know what they’re investing in, and be aware if they plan for a long-term hold that they’ll likely have to withstand some economic winter.

The BAM Bottom Line: Ivan has spoken extensively about having the type of investments that can handle whatever weather is currently outside. BAM looks for the right opportunities in the right areas and secures the right financing – including using HUD and agency loans for long-term financing that takes the interest-rate risk right off the table. Currently, Ivan says that they look at about 200 opportunities to find one that’s a good deal.

Want to learn more about multifamily investing and finding a good deal in any market? Go to ivanbarratteducation.com to access a free library of education videos and articles!