We Intend to Relish the Next Recession

By Progressive Property Management - Wednesday, October 5, 2016
Recessions are part and parcel of capitalism. Â The definition of a recession is a fall in the Gross Domestic Production for two consecutive quarters. Â Not all recessions are like the Great Recession which lasted 6 quarters and created financial havoc for most sectors of the economy. Â But this recession ended in June of 2009 and we have been in a recovery for over 7 years. Â 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. Â 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. Â 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. Â Usually the federal government pays down debt during a recovery, this time we have been accumulating debt. Â 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. Â 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. Â 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. Â 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). Â 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. Â 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. Â Why is it that real estate sales suffer as property management expands the number of clients in their portfolio?
  • Tenants stop behaving. Â As their income becomes less secure, they simply don't abide by the contract and can't pay as agreed. Â Currently, our monthly delinquency rate is 1% of our portfolio. Â If we manage 500 doors, that is 5 late payers. Â We have not evicted a tenant places in one of our units for over 6 months. Â In a recession, that delinquency rate climbs to 5% and evictions climb to 1% per month.
  • Finding quality tenants becomes harder. Â Properties stay vacant longer and tenants move out more often. Â 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. Â 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. Â No matter how short, long, severe or minimal the next recession, we are positioned to be the trusted resource for our markets.

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Progressive Property Management
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