Recessions are part and parcel of capitalism. The definition of a recession is a fall in the Gross Domestic Production for two consecutive quarters.
Not all recessions are like the Great Recession which lasted 6 quarters and created financial havoc for most sectors of the economy. But this recession ended in June of 2009 and we have been in a recovery for over 7 years. It is not a matter if we will endure another recession, it is a matter of when; and that ‘when’ in all likelihood will occur in the next 3 years. I believe although this recession may be mild for most sectors of the economy, it may be particularly harsh for real estate sales and the real estate industry. Why?
- The total federal debt is over $20 trillion, and even during the recovery we have been adding another 500 million of it per year. Usually the federal government pays down debt during a recovery, this time we have been accumulating debt. If there is another recession, the government won’t have the capacity to stimulate the economy and end the recession through spending.
- It is becoming increasingly difficult to cut spending on the national level. Non-discretionary spending, that is Medicare, Medicaid, Social Security, interest on the debt and for both parties, the military now consumes 85% of the budget. There is just not any fat left to cut.
- 2016 could be the year that democrats have a super majority in both the California assembly and senate. Given their policies, they will find it difficult to make cuts in a recession and may rely on increased taxes to balance the budget (which is mandated by law). More taxes mean less disposable income for people to spend our way out of a recession.
- In 1980, 20% of the workforce (retail, real estate, restaurants) were vulnerable in a recession: they were easily fired. That percentage now stands at over 35% and they are the first jobs to be cut in a downturn.
While real estate prices may decline slightly and the number of home sales decrease significantly (as much as 20%) property management will be in high demand. Why is it that real estate sales suffer as property management expands the number of clients in their portfolio?
- Tenants stop behaving. As their income becomes less secure, they simply don’t abide by the contract and can’t pay as agreed. Currently, our monthly delinquency rate is 1% of our portfolio. If we manage 500 doors, that is 5 late payers. We have not evicted a tenant places in one of our units for over 6 months. In a recession, that delinquency rate climbs to 5% and evictions climb to 1% per month.
- Finding quality tenants becomes harder. Properties stay vacant longer and tenants move out more often. It is not sufficient to throw an ad in Craigslist and call it a day.
- More owners choose to rent their property rather than sell at a discount. These ‘accidental landlords’ become long term clients.
- More SMIPOs find the task of managing their own property too difficult and choose professional property management.
- If democrats control the state government, they have historically been tenant friendly and may pass laws that make self-managing more arduous.
At Progressive, we intent to relish the next recession and assist property owners with the job of managing their rental properties. No matter how short, long, severe or minimal the next recession, we are positioned to be the trusted resource for our markets.