Updated: Mar 7
When talking with passive investors and sponsors I hear a lot of misconceptions about how the current pandemic is affecting different property asset classes. Many investors compare today’s economic downturn with the great recession of 2008, but the two are not alike because the reasons for the problems were different, and the impact on people is different as well.
There are 3 misconceptions that I keep hearing over and over, and those are the ones that I would like to share with you. As you’ll see, they have a major impact on the different property asset classes that investors and sponsors like to purchase.
For those who are not familiar with the different property asset classes, here’s a quick refresher. Class A properties are high-end, mostly newly built buildings in the best neighborhoods, located in the best areas of town. They are generally either newly built or up to 5 -o-10-years old and usually have no deferred maintenance.
Class B properties are a bit older than Class A, but they still have good amenities and were generally built in the 80’s and 90’s. Usually, these properties have low to medium-low deferred maintenance.
Class C properties are older than those in Class B, and were built in the 50’s and 60’s. They often have a lot of deferred maintenance and usually have lower rents because they attract tenants that aren’t that financially strong.
Class D properties are older, similar to Class C properties, but the property has been neglected and need significant repairs. Tenants in these properties are usually looking for cheap rents and finding good tenants can be difficult.
The asset classes that performed well during the “great recession” are the ones you want to invest in now.
During the great recession, a lot of homeowners lost their homes. Many of those homeowners purchased their homes without having the necessary resources, income, and down payment, and ended up losing their homes. But people still (and will always) need a place to live. Those homeowners couldn’t afford to rent in Class A multifamily properties, and for many, Class B was expensive as well.
So, how did this impact the market during the great recession? The asset class that was in high demand post the 2008 recession was Class C properties. Many investors purchased Class C properties during that time, thinking that if another recession were to occur, they would have the ideal property to rent. After all, it was the most resilient asset class during the great recession. However, the current pandemic changed that, as the those who lost their jobs and fueled the 13% unemployment were mostly service workers with low paying jobs – the classic Class C and D property tenants.
Unfortunately, it meant that many of those tenants couldn’t afford Class C properties and could only look to rent Class D properties. Class D properties became the leader in rental demand during the pandemic, not the Class C properties that investors had thought would take the lead. While Class D properties are in great demand, they do have many challenges with rent collections and more deferred maintenance.
Sadly, for many investors, Class C properties didn’t turn out to be the “winning asset class” that they thought they would be. This shows me you can learn new things from each recession, and that you simply can’t replicate the same thinking and strategy each time, as it might not protect you during the next downturn.