BIGGEST RISK with Jonathan Twombly - CREPN Radio
Darrin: [00:00:08] If you could identify and speak to what you see as the biggest risk that investors face. [00:00:13][5.5]
Jonathan: [00:00:15] So I think the biggest risk and this is a big part of why we sold the property is actually, I think the biggest risk that investors face is actually the economy. And that's gonna sound very strange given that we've got you know the best unemployment rate in 50 years and the economy is chugging along pretty quickly. That's precisely the time at which the economy becomes a risk. You know the economy is not a risk after a crash after a crash all the risk is out of the economy. You're going to that's when growth starts right again. So you're you're you're stepping into things as they're on an upswing when you're at the top. The only place to go is down. I think a lot of people are hoping that we're somehow magically going to stay at this, you know at the height of the economy for the indefinite future. And and that kind of hope is getting priced into deals. So people are pricing in, you know high employment. They're pricing in record high occupancies. They're pricing in rent growth that may or may not happen. But it all really depends on continued economic growth at the pace that we have it right now. So people are paying a premium for properties based on economic news, which honestly, if you look at history cannot sustain itself. And it can't sustain itself for very much longer. And you know when for instance, when employment reaches a peak is when it starts going down, like that sort of basic economics. If you follow the economic analysis that that's a lot of people writing right now. I mean that's that's pretty standard. You know a lot of people trying to figure out when this next recession is going to come. They're spending a lot of energy doing it and they're they're bad at predicting it. But I think everybody knows that something is coming. But in multi-family world they feel like a lot of people are are really turning a blind eye to it. Or, they're kind of giving some lip service to the fact that in the kind of you know an economic downturn is going to happen in the not too distant future. But they're not really adequately planning for this risk right. So you know. So I think that is the biggest risk. I think another big risk, and it's related is if you is relates to a big reason why we sold. If you're dealing with C properties. That the tenant class and see properties. This is also often referred to as the renter by necessity class. There are people who know they've they've got jobs they could pay the rent. This is market rent territory but in an economic downturn they will be hurt the worst they always are. You know in the last downturn we had I think 11 percent unemployment at the peak. But if you look at people with a four year college education their unemployment rate peaked at about 3 percent which means that for everybody else it was much higher. The further down and literally you know the charts will show you by education less education somebody had the higher the unemployment rate was. So if you're owning a property or looking at properties that are C class properties you're taking a big big risk that when the recession comes you're going to have a lot higher vacancy right in the hole. There's another mythology around multi-family investing which is that rentals do well in recessions. Right, and that that mythology comes from two things. One is that multi-family does better than other asset classes in recessions. It's more resilient for the reasons we talked about before because people don't go out of business. Right. So it does better. But I mean by better if you look at the last crash, you know multi-family I think fell in value by only 32 percent. It was the best performer of all the asset classes because it fell by only 32 percent in the last crash. Right. So which means others did much worse. Right. So because of that people have conflated that. And then also after the last crash when we had the housing foreclosure crisis then a lot of people moved into multifamily who had been owning before. So occupancy really shot up but they've also conflated that with the recession that didn't happen during the recession to happened after the recession. But times are still bad, so they still think of it as the recession but it wasn't. So when people say multi-family does well in a recession if they're buying based on that assumption they're really making a big mistake because it just emphatically does not do well in a recession. It just does less bad than other asset classes do. [00:00:15][0.0]
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