A hot topic in the news recently has been around the possibility that the United States could default on its debt obligations. Simply speaking. the US government is facing a debt ceiling crisis.
What is the Debt Ceiling?
The debt ceiling puts a limit on the amount of money that the United States government is allowed to borrow. The debt ceiling was created in 1917 to prevent the government from overspending. The debt ceiling is set by Congress, and it has been raised 102 times since it was created.
The debt ceiling is important because it prevents the government from defaulting on its debt. A default could have a devastating impact on the economy. It would lead to a government shutdown, and could result in a recession, higher interest rates, and a decline in the value of the dollar. It would create a ripple effect throughout the economy, including the multifamily real estate market.
It's become a controversial issue. Some people believe that it is an unnecessary constraint on the government's ability to borrow money. Others believe that it is an important tool to prevent the government from overspending.
How a Debt Default Could Impact Multifamily Real Estate
The multifamily real estate market has already been facing challenges including higher rates, rising construction costs and a shortage of skilled labor. A US debt default would likely make these challenges worse.
Here are some of the ways that a US debt default could impact multifamily real estate:
Lower demand for multifamily housing: A deeper recession could lead to lower demand for all types of housing, including multifamily housing. This is because people would have less money to spend on housing. If the government enters a shutdown, the impact would be more pronounced in areas that have a heavy concentration of government jobs, such as Washington, DC and Northern Virginia.
Higher interest rates: A US debt default would likely lead to higher interest rates. This is because investors would demand a higher risk premium to lend money to the government. Higher interest rates would make it more expensive for multifamily property owners to borrow money, which could lead to higher rents and lower occupancy rates.
Creating A Risk Off Environment: A US debt default would likely lead to decreased investing activity overall, including in real estate. Investors would once again be less inclined to put their money into asset classes with any risk.
Why a Default is Unlikely
In recent years, there has been a growing partisan divide in Congress. This has made it more difficult for the two parties to work together on issues like the debt ceiling, but both sides would like to come to a resolution and it's unlikely we'll see a default. (In fact, there may even be an agreement in place by the time you read this.)
The United States has always paid its debt and has a strong incentive to continue doing so. If the government defaults on its debt, it would lose the confidence of investors and would have much more difficulty borrowing money in the future. making it increasingly difficult to function and would have a negative impact on the economy.
There have been a few times in history when the government has come close to defaulting. However, these times have always been resolved through bipartisan cooperation. In 1979, for example, the government came close to defaulting on its debt because of a dispute between President Jimmy Carter and Congress over the budget. The two sides were able to eventually reach a compromise and avoid default.
Potential Positives From a Debt Ceiling Agreement
Assuming an agreement is reached, it could send a variety of positive signals to the market and help to improve investor confidence. It could signal an end to higher rates, creating renewed interest and activity in the markets.
How to Prepare During the Debt Crisis
While an actual default is unlikely, you may still want to take steps to prepare. Fortunately, those steps aren't much different from how we've been adjusting to rising rates and a potential recession already.
These includes having a financial cushion in place to cover unexpected expenses and working with your lender to lock in a fixed interest rate. You should also monitor the economic news closely and be prepared to make changes to your business plan if necessary.
Here are some potential steps multifamily property owners can take to protect your assets from a default:
Review your financial statements: Make sure you have a clear understanding of your financial situation, what your cash flow needs are, and where you can cut back on any unnecessary expenses.
Build up your reserves: Having a financial cushion will help you weather any storms that come your way.
Acquire Fixed Rate Debt and a Rate Cap: See if there are any changes you can make to your loan terms to make it easier to manage your payments and protect you from potential future increases and volatility.
Stay informed: Monitor the economic news and be prepared to make changes to your business plan as needed.
Despite the current uncertainty surrounding the debt ceiling, the multifamily sector looks strong overall and the prospect of an actual default appears doubtful despite the current rhetoric. A debt ceiling agreement could result in some positive news and help a sector that is expected to resume growth in the coming years.
At the end of the day, we know that the multifamily remains a great place to invest for investors who are looking for a reliable source of income and the potential for capital appreciation. If you'd like to learn more about investing with Blue Lake Capital, just click here and complete the form; our investor relations team would love to connect with you.
As always, Be Bold, Be great, and Keep Pushing Forward!
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About Ellie Perlman
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the founding host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.