Multifamily vs. Retail Property Investment in the Economic Crisis

Multifamily vs. Retail Investment Properties in the Economic Crisis
By Brad Motley


Introduction
Many real estate investors have found themselves lost in the process of weathering this economic storm. Some of them might not have lost as much as investors on Wall Street, and perhaps some of them lost more. However, the investors that are truly in a bind are the ones who rely on income-producing properties as a part of their retirement or as a revenue for their business, and don’t know where to invest their money. Without a doubt, the current economic trends have changed the market, but there are still many profitable real estate investment opportunities out there, despite the slump that our nation endures. An analysis of multi-family property investment vs. retail property investment will show that there is still money to be made in real estate, no matter the state of the economy.

Current Economic Conditions
The economy is reaching a level of instability to the likes of which we have never seen. Throughout these past few years, we have seen prices of gasoline exceed $4.00 per gallon, and lending institutions nearly shut their doors for good. It would take entirely too long to recap everything that has happened and how it has affected the real estate market, but for the sake of argument we are going to focus on four key economic conditions. The first condition we will discuss will be the decline in the housing market. For many real estate professionals this has been the most concerning aspect of today’s economy. It is agreeable that it has extremely hindered the residential market, but it does not affect commercial real estate in such a negative way. Secondly, the decline in the stock market has had quite an effect on the real estate market, specifically, the commercial real estate market. Also, the consequences of the increased cost of living must be assessed. This condition goes hand in hand with our final condition, the increase of unemployment. All of these factors change the climate of commercial real estate, but they each alter the different branches of commercial real estate in different ways.

Retail Properties
Retail properties tend to be a risky investment in almost any economic condition. This is mainly due to the fact that a retail property owner is only as successful as the tenants who occupy the property. Considering that the majority of these tenants tend to be large national chains and corporations, many retail property owners have taken quite a hit. One bit of good news for these retail property owners, is the stability retail properties endured throughout the decline in the housing market. The only consequence of the decline in the housing market was the lack of lending to buy new retail properties, which was completely indirect. However, the decline in the stock market delivered a huge blow to the retail property owners. Retailers did not account for much, if any, of the $750 billion dollar bail-out, so many retailers were left to cover their losses on their own, which resulted in most of them “going dark”, or closing some of their stores. This leaves retail property owners with unplanned vacancies, and a lack of expanding retailers to fill them. As a result, in an article published by the NY Daily News, “Suzanne Mulvee, a senior economist at Property & Portfolio Research, figures vacancies could rise as high as 12.5% this year”(The Associated Press). The consequence is simple, vacancies equal losses for retail property owners. An increased cost of living and increased unemployment has also changed the retail market. With cost of goods rising directly with gas prices, the overall cost of living has reached a level of ridiculousness. A high cost of living means that there is less disposable income with which to buy goods supplied by retailers. This theory directly attests to the often over looked power of the consumer, which, according to John W. Schoen, has caused retailers to report “steep drops in October sales”(Schoen, John). The lack of success of many retailers will continue to hinder the success of retail properties until the economy is back on track.

Multifamily Properties
Multifamily investment properties completely differ from retail investment properties due to their different clientele. Overall, multifamily properties have been viewed as risky and stressful, mainly because the high number of units accounts for a high turnover. However, they tend to stay somewhat stable despite harsh economic conditions, but this doesn’t mean that they are not affected by these same conditions. Since they do not cater to big corporations, multifamily properties are generally safe from activity in the stock market. It is the housing market that alters the multifamily market more than anything else. At the end of the day, everyone has to have a place to live, and those who don’t own their own home tend to rent, and the lack of lending combined with peak levels of foreclosures have left more and more people to temporarily live in apartments until conditions change. Shawn Cannon, a commercial real estate broker out of Lubbock, Texas says “The rental market right now is very strong for the landlord. The mortgage crisis has left people with credit scores of 650 and below to find alternate means of housing” (Cannon, Shawn). The increased cost of living combined with the increased rate of unemployment has also helped the multifamily property investors. Both of these factors have left many Americans to endure these hard times by finding a cheaper way to live, and as long as rent payments are lower than mortgage payments, then moving into an apartment is a feasible choice. The current economic conditions have made multifamily properties easier than ever to manage, but when the storm starts to clear, multifamily investors will have to endure the headaches that come with a thriving economy.

Conclusion
In conclusion, once both investments are evaluated in two different stages, one could see that both could be profitable. Multifamily properties have a high volume of cash flows right now, but once the economy shifts upward, then they might go back to struggling as they did before. Overall, multifamily properties are very profitable and safer than retail properties. According to an online article posted by Real Estate Investment Raliegh, “Multi-family income streams have lower catastrophic risk than office, industrial or retail. With those investments, the economy could "tank" or a company could downsize and your property might stay vacant for years. One-year leases on residential properties allow you to raise rents faster in an improving market” (Wade, PJ). In contrast, everyone remembers the old adage “no risk, no reward”. Retail investors could make a profit if they buy distressed property. By buying a distressed property, an investor could make corrections on any deferred maintenance, then sell the property for a higher sales price once the economy starts to turn upward. It all goes back to rule number one of investing: buy low, sell high. Neither one of the properties is really better than the other, it all depends on your plans. Multifamily properties will bring about immediate cash flows, but in a few years, these cash flows might fizzle out. Retail properties could be profitable by “flipping” them, but that requires enough capital to endure the losses until the economy escapes the recession. Either way, real estate investment should not be abandoned due to a financial crisis, there is always money to be made.



Works Cited
Cannon, Shawn, Real Estate Broker for ERA in Lubbock, TX. Personal Interview. 4 November 2008.

“Learn About Multi-Family.” www.deaton.com. 2006. http://www.deaton.com/learn-about-property.asp?Deaton=26

Schoen, John W. “Economy’s Worsening Slide Challenges Obama.” www.msnbc.com. 7 November 2008. http://www.msnbc.msn.com/id/27576844/

The Associated Press. “Retailers fight to survive, slash prices to avoid going out of business .” www.mydailynews.com. 8 March 208. http://www.nydailynews.com/money/2008/03/11/2008-03-11_retailers_fight_to_survive_slash_prices_.html

Wade, PJ. “New Rental Market Survey Charts Western Economic Shift.” www.realitytimes.com. 3 July 2007. http://realtytimes.com/rtpages/20070703_canadashift.htm