Stimulus And Uncertainty: Investing In The Current Environment

Last week President Biden unveiled his $1.9 trillion American Rescue Plan - the latest round of economic stimulus aimed at providing economic relief to individuals, families, and small businesses along with other provisions.  

The next round of stimulus relief is a matter of when not if. As both sides wrestle over specific details of Biden’s relief plan, what is not in dispute is that individuals and households will receive a third round of stimulus checks. The only hang-up is over the amount: The Republicans are proposing $1,000 while Biden’s plan is for $1,400.  

The other feature of the stimulus bill not in dispute is the allocation of funds for the accelerated rollout of the COVID-19 vaccines.

Finally, small businesses will also be a priority of the American Rescue Plan in which $15 billion in grants will be allocated to small businesses employers, along with $35 billion in low-interest loans. 

On top of this, the Small Business Administration's Paycheck Protection Program from Trump’s stimulus plan will continue, which consists of $284 billion in loans to help businesses keep their workers employed during the pandemic.

When the latest stimulus plan passes, various forces will be at play that will highlight the value of including commercial real estate - especially certain segments - in your portfolio.

If the first round of stimulus under the Trump administration is any indication, the effect of the personal stimulus checks, the small business assistance, along with the rollout of the vaccine, should accelerate the reopening of businesses, travel, sporting events, and entertainment - all having the effect of stimulating the economy and improving job and income growth.  

Although commercial real estate as a whole experienced declines in rents and occupancy in 2020 due to the pandemic, multifamily weathered the storm better than most property sectors according to CBRE.  

Anticipating the reopening of America, in its 2021 U.S. Real Estate Market Outlook: 

“CBRE forecasts a return to pre-COVID vacancy levels and a 6% increase in net effective rents next year, with a full market recovery occurring in early 2022. The economic rebound will lead to rising multifamily demand, largely from “unbundling” - certain renters moving out of their parents’ homes or those of friends as job opportunities provide more financial flexibility to live independently. Demand levels in 2021 likely will fall short of pre-COVID peaks in 2018 and 2019 but should rise significantly from 2020.”

Besides the expected rebound in the multifamily sector due to a recovering economy, another factor will be at play that will make multifamily an even more appealing play - stock market volatility.

Last March, when the first round of stimulus checks hit, a phenomenon developed that affected the stock market few anticipated. 

Armed with stimulus money and confined to their homes, many novice investors took to day trading for the first time. Millions flocked to the free-trading platform Robinhood looking to hit it big. Most approached stock trading like gambling - ignoring the market and economic fundamentals - with a boom or bust attitude. Many even boasted on social media of their losses. The effect has been extreme volatility in the equity markets.  

Many of these newbie day traders are even banding together to trade in blocks to wreak havoc on the markets. If you’ve been following the news lately, one such group of traders who convene on subreddit r/wallstreetbets recently made waves in the news when they banded together to buy failing Gamestop (GME) stock to put a short squeeze on hedge funds who were shorting the stock. 

The result was a loss of billions by the hedge funds and pressure by these same hedge funds on Robinhood to halt trading Gamestop trading activity. The effect has been extreme volatility that has taken innocent bystanders on a wild ride.  

At the beginning of January when the r/wallstreetbets scheme started to take hold, Gamestop was trading at $17.25 a share. Last Thursday, when the buying frenzy hit the fever pitch, Gamestop hit a record high of $469.42. 

That’s when Robinhood stepped in and halted trading of Gamestop stock due to hedge fund pressure from whom they make the majority of their income from high volume options trading by these funds. It worked. As of the writing of this post, Gamestop closed at $85.25 - a drop of 82%.

I know r/wallstreetbets was trying to stick it to the man - and it worked - but what about those individual investors who bought at $469.42 who immediately suffered losses when the bottom fell out? “The man” wasn’t the only person who got it stuck to. Many innocent investors lost money as well.

This combination of economic growth along with extreme market volatility creates ideal conditions for investing in commercial real estate (CRE) - especially in segments ideally suited for times of economic uncertainty. Sophisticated investors have long leveraged commercial real estate as a hedge against economic uncertainty.

By incorporating CRE in your portfolio, through strategic investments in recession-resistant markets and segments, investors can avoid the ups and downs of the broader market through reliable income and stable growth.

And passive investments offer participation without the need for getting your hands dirty.  Wouldn’t it be ideal to invest in a segment that thrives on uncertainty and volatility while still delivering consistent income and growth? 

That segment exists in the affordable housing sector of multifamily where the sector saw rent growth and occupancy in 2020 - bucking the trend of the rest of the CRE asset class.  

Embrace economic growth while hedging against market uncertainty. Consider CRE - particularly multifamily.