I would say multi-family/student housing offer the best value. They will be less affected in a down cycle as people stop buying residential assets and continue to lease apartments to live. For student housing, it relies more on the school itself. As long as the supply and the demand look healthy around a particular school and the school enrollment is there, student housing will do well.
Which sectors will offer the best opportunities in a down cycle?
We keep hearing about a looming down cycle in the market. Assuming this plays out, which asset classes will provide the best value? Is a down cycle a good time to look for value-add opportunities?
These things are hard to predict. However, a good general rule is to buy things at a significant discount to replacement cost in markets with strong, forward-looking demographics and demand, centers of innovation and education, and where there are stronger barriers to entry. Retail, in general, is more exposed in a down cycle than other sectors and is undergoing systemic change as well. Office and hotels often suffer in a downturn, depending on its severity. People always need places to live, so multifamily in the right markets, senior living in the right markets with the right demographics and, after the passing of the new tax law, more favorable tax treatment, as well as industrial in high-demand markets with barriers to entry, should be most desirable through a down cycle, I would think.
The recession phase has historically been the shortest, lasting slightly less than a year on average — and the broader market has performed poorly during this phase (roughly 15 percent average annual return). As economic growth stalls and contracts, sectors that are more economically sensitive fall out of favor, and those that are defensively oriented move to the front of the performance line. When the threat of recession looms, investors tend to look to reduce their exposure to riskier assets. Basically, a “flight to safety” to higher-quality and fixed-income asset classes typically occurs, and bonds tend to outperform stocks during recessions. On the real estate side, when a soft recession is in play, it is a good opportunity to buy for the long run until the new cycle revives.