Are you worried about the state of the economy? Despite the challenges posed by global pandemics, stock market fluctuations, and general uncertainty, investing in commercial real estate can potentially offer some stability during a recession.
This article explains why investing in commercial real estate is a good option for diversifying portfolios and navigating challenging economic conditions. Whether you’re a novice or an experienced investor, learn how careful financial planning and intelligent strategies can help safeguard your returns, even in unpredictable times.
Investing in commercial real estate that can withstand economic downturns involves making strategic decisions. Although there is no way to eliminate all risks, there are multiple strategies that can help reduce the effects of a recession on your investments.
- Investing in commercial real estate is a great way to safeguard against economic downturns.
- Look for properties that have multiple revenue streams, such as a mix of retail and office space.
- Invest in areas that are projected to grow, rather than those likely to suffer from a recession. Make sure to consult a real estate agent or market analyst before making any major decisions. Research potential investments thoroughly, and make sure to factor in non-monetary costs such as taxes, maintenance fees, and insurance.
Identifying Recession-Resistant Property Types
Remember that investing in multifamily real estate is essentially investing in people’s need for shelter, which is a basic necessity. This makes it one of the few expenses, along with food staples, that individuals are likely to prioritize even during times of severe economic hardship.
During times of potential homelessness, people are willing to give up things like entertainment, luxury items, dining out, and travel in order to prioritize having a place to live. This is why it makes sense that multifamily properties have historically performed better than other types of commercial real estate during economic downturns.
CBRE Economic Advisors conducted an assessment of how apartments performed in comparison to office, industrial, and retail sectors during the 2001 recession and the Great Recession of 2008-2009.
It was found that apartment rents were more resistant to changes compared to other types of properties. Moreover, the increase in the rent of multifamily apartments after the recession was significantly higher than that of any other property type.
Residential income properties, also known as multi-family properties, are a sought-after type of property that can withstand economic downturns. They include apartment buildings, townhouses, or condos with multiple units rented to tenants. These properties remain in demand during recessions due to several factors.
- Housing demand: Housing remains a basic necessity for people even during economic downturns. In fact, during these periods, some people may switch from owning a home to renting an apartment due to financial difficulties, resulting in a surge in demand for multi-family housing.
- Affordability: During times of economic downturns, rental rates in multi-family properties tend to be more affordable than those of single-family homes. This makes multi-family properties more appealing to a wider range of the population who are price-sensitive.
- Lower vacancy rates: Investors may benefit from investing in multi-family properties as they typically have lower vacancy rates than other property types due to their wider appeal. This can result in more reliable cash flow.
- Access to financing: Lenders view multi-family properties as less risky, which makes it easier for investors to obtain financing. This is particularly helpful during a recession when credit markets may become stricter.
- Resilience to job loss: Although recessions can cause some tenants to struggle with paying rent due to job loss, multi-family properties typically have a varied tenant base which can minimize the consequences of a few tenants’ financial troubles.
In this article, I discuss the pros and cons of multifamily properties. Please read it carefully to make an informed decision. If you’re interested in identifying the best investment opportunities for your unique investing strategy, continue reading as we explore each point in more depth.
According to the official definition, if a country’s gross domestic product (GDP) goes down for two quarters in a row, it is considered to be in a recession. Based on this definition, the United States experienced an economic recession in the summer of 2022.
Despite low unemployment, record corporate earnings, and Q3 GDP growth, some experts argue that a recession may be on the horizon. The current state of recession is still being debated, but many economists agree that an economic downturn is likely to occur soon.
While many commercial real estate sectors are bracing for an economic downturn, the U.S. real estate market is seeing significant growth in the industrial sector. This increase in demand for industrial spaces has been ongoing for over a decade with the country’s recovery from the Great Recession, but the recent surge can be attributed to the e-commerce boom caused by the COVID-19 pandemic.
In recent years, industrial warehouses have become highly resistant to recession, mainly because of the following reasons:
- E-commerce growth: The need for warehousing and distribution centers has increased greatly due to the growth of e-commerce. Since more people are shopping online, businesses need more space to store and transport their products. This trend is expected to continue, even during tough economic times, because people prefer online shopping for its convenience and usually competitive pricing.
- Supply chain resilience: The importance of supply chain resilience has been emphasized by economic uncertainties and global events like the COVID-19 pandemic. As a result, many companies are reassessing their supply chain strategies, which has led to a higher need for industrial warehouses that offer effective storage and distribution solutions.
- Technology and automation: Adopting new technologies like robotics and automation has improved operational efficiency in industrial warehouses. As a result, these warehouses are becoming more appealing as investment assets due to their potential for higher returns and lower operating costs.
- Last-mile delivery: The demand for last-mile distribution centers has increased as businesses strive to offer quicker delivery times to their customers. These distribution centers are smaller and situated near population centers to facilitate faster delivery. They will continue to be in demand despite changes in economic circumstances.
Investors who want to diversify their real estate portfolios are now considering medical office properties. While medical office buildings were previously seen as a niche sector, they are now attracting a new group of investors. These investors have realized that the sector holds its value even during economic crises.
Today we will explore several reasons why medical office buildings are resistant to economic recessions. These properties are a safer and low-risk option for those seeking to expand their real estate portfolio because of their consistent performance. Additionally, compared to other real estate sectors with similar low-risk levels, healthcare real estate typically generates higher cash yields.
Medical office buildings have demonstrated resilience to economic ups and downs in the real estate market. As a result, there has been a substantial increase in investment in this industry, particularly by real estate investors seeking more stability while also attaining high yields compared to other asset classes.
Medical office buildings are recession resilient due to their provision of critical healthcare services. Unlike non-essential services like beauty treatments, medical treatment cannot be postponed for too long.
In addition, a large number of individuals in the United States have obtained health insurance, through either public or private means, which has made medical care easier to access. Having insurance reduces the likelihood of having to delay a necessary healthcare service because of the financial strain it may cause during tough economic times.
One more reason why the sector is strong is because of changing demographics. As people age, they need more health care services. For instance, a person in their 20s might only go to the doctor once a year or every other year. People who are 65 years and older usually visit the doctor seven or eight times a year, sometimes even more.
The demand for MOB properties has significantly increased in almost all locations due to approximately 10,000 Americans reaching the age of 65 daily, as reported by the U.S. Census Bureau.
Grocery-anchored retail centers
The biggest risk during a recession in Commercial Real Estate is that tenant businesses may not be able to pay rent due to sales decline. Businesses that rely on discretionary spending (such as clothing, restaurants, and entertainment) often struggle in a recession because consumers prioritize spending on necessities.
During recessionary periods, businesses such as drug stores, grocery stores, banks, hospitals, multifamily apartments, and hardware stores that cater to essential needs or housing needs tend to be more resistant.
The message is suggesting that investing in commercial real estate can be a wise decision during an economic cycle. If the property is leased to essential businesses, it can provide defensive protection for the investment portfolio during a recession.
Essential businesses are less likely to be affected by the recession and can recover quickly during the next expansion cycle. This means that there is a reduced risk of tenants failing to pay rent, which allows the property to continue functioning effectively.
During an economic downturn, businesses and individuals tend to downsize which impacts the performance of various commercial real estate assets, such as office properties. This is because lower demand leads to reduced property revenues for investors. Similarly, the retail sector and many other asset types also experience this impact.
But not self-storage.
Self-storage is an excellent option for real estate investing during a recession. The recession-proof performance is due to several reasons:
- Downsizing: In times of recession, people often reduce their living space as a cost-saving measure which can create a requirement for additional storage space for their possessions.
- Dislocation: The instability in the economy may lead individuals to move temporarily for jobs or personal reasons, resulting in a need for storage for their belongings.
- Business use: During difficult economic periods, small businesses and entrepreneurs may opt to use self-storage units instead of traditional commercial spaces to save on overhead expenses. This is a cost-effective alternative.
- Lower operating costs: Investors find self-storage facilities appealing because they come with lower operating costs when compared to other types of commercial real estate properties. As they generally require minimal maintenance and staffing, this leads to a higher net operating income (NOI).
Strategies for Recession-Proof Investing
Investing in a way that is not affected by recession means making smart decisions that keep your investments steady and profitable, even if the economy is doing poorly. The strategies you mentioned are essential for achieving this. Here is a brief summary of each strategy:
Focus on strong fundamentals: If you want to invest in properties, make sure they have strong underlying fundamentals like a great location, good condition, and positive demographic trends. These factors can help to make sure that the property stays valuable and desirable to tenants even if the economy dips.
Diversify your investment portfolio: To reduce the impact of market changes on your investment, diversify your portfolio by investing in a variety of property types, such as retail, office, industrial and multifamily, and in different geographic locations. This will help to minimize the risks associated with certain sectors or regions.
Conduct thorough due diligence: To make wise investments, make sure you conduct thorough research and analysis on the property, market conditions, and potential risks. This includes evaluating the property’s financial performance, inspecting the physical condition, assessing the local real estate market, and analyzing the tenant mix. By doing so, you can identify potential problems and make informed investment decisions.
Invest in properties with long-term leases: During a recession, properties that have tenants with good credit and long-term lease agreements can offer a more consistent cash flow. These tenants are generally more reliable in their rent payments even during tough economic times, ultimately helping to sustain the investment’s profitability.
Look for value-add opportunities: Investing in properties that can be improved, renovated, or redeveloped can provide higher returns by increasing their value. By making the property more attractive to tenants, you can potentially earn more rental income, lower vacancy rates, and improve overall financial performance. Additionally, this strategy can help you stay competitive during a recession.
Managing Properties during a Recession
Managing properties during a recession can be challenging, but with strategic planning and proactive measures, you can minimize the impact of economic downturns on your investments. Here are some key strategies to consider:
1. Tenant retention strategies: During a recession, it’s important to prioritize tenant retention as vacancies become harder to fill and new tenants may be difficult to find. Some methods to retain tenants include:
- Maintaining open communication and addressing tenant concerns promptly
- Offering flexible lease terms or payment plans to accommodate tenants facing financial difficulties
- Providing excellent customer service and responsive property management
2. Cost-cutting measures: To maintain the financial health of your property investments during a recession, it can be helpful to reduce expenses. This can improve cash flow. You can consider some cost-cutting measures such as:
- Renegotiating contracts with service providers and suppliers for better rates
- Implementing energy-efficient upgrades to reduce utility costs
- Reducing non-essential expenses, such as marketing and advertising
- Considering temporary staffing adjustments if necessary
3. Making improvements to your property: This can increase its value and appeal, which can help you attract and retain tenants even during a recession. Consider enhancing the property’s attractiveness by implementing cost-effective improvements, such as:
- Updating common areas and landscaping to create an inviting atmosphere
- Conducting regular maintenance to prevent costly repairs and maintain the property’s overall condition
- Offering additional amenities or services that cater to tenant needs
4. Renegotiating lease terms: Renegotiating can be beneficial for tenants who are experiencing financial difficulties and wish to stay in a property while keeping cash flow steady. It can also help prevent vacancies. There are various ways to renegotiate that can be considered.
- Offering temporary rent reductions or deferrals in exchange for a longer lease term or other concessions
- Allowing tenants to downsize to smaller units within the property
- Offering lease extensions with favorable terms for both parties
To reduce the negative effects of economic recessions on your investments, implement good property management strategies. Stay proactive, communicate regularly with your tenants, and consistently monitor the market. By following these steps, you will be equipped to make educated decisions and adapt your methods as needed.
Financing and Liquidity Considerations
Financing and liquidity considerations are crucial when investing in commercial real estate, especially during a recession. Here are some key points that should be considered:
When you borrow less money against the value of your property (using conservative leverage), you decrease your risk during an economic downturn. This means that if property values go down or rental income decreases, you’ll still be able to maintain positive cash flow because you have less debt to pay off. It’s important to aim for a loan-to-value (LTV) ratio that you can easily manage.
Access to capital during a recession
Obtaining financing can be harder during an economic downturn because lenders might have stricter criteria or be more careful when lending money. To increase your likelihood of getting a loan during a recession:
- Maintain a strong credit score and financial track record
- Build relationships with multiple lenders, including banks, credit unions, and private lenders
- Consider alternative financing options, such as seller financing or joint venture partnerships
Partnering with experienced investors
Collaborating with knowledgeable commercial real estate investors during a recession could enhance your access to capital and help you tackle various challenges. With their expertise, resources, and connections, experienced partners can support you in securing financing and managing investments more efficiently. You can explore opportunities to connect with potential partners by participating in real estate investment clubs, attending industry conferences, or engaging in online forums.
Recession-proof Commercial Real Estate Investing FAQs
What types of properties are considered recession-resistant?
Recession-resistant properties are types of real estate that stay popular even when the economy is suffering. Some examples are apartment buildings, warehouses, self-storage units, and healthcare properties like doctor’s offices. These types of properties are more likely to do well when times are tough because people need housing, online shopping is growing, people need storage, and healthcare services are always important.
How does diversification help protect my commercial real estate investments?
Diversification helps protect your commercial real estate investments by spreading risk across different property types and geographic locations. This reduces the impact of market fluctuations, economic downturns, or sector-specific issues on your overall portfolio. By diversifying, you can mitigate potential losses and maintain more stable returns, even during challenging economic conditions.
What is the importance of strong fundamentals in a recession-proof investment?
To make sure your commercial real estate investment remains valuable during economic recessions, it’s important to focus on strong fundamentals. These include factors like prime location, good property condition, favorable demographic trends, and high-quality tenants. By paying attention to these key points, you can ensure a stable income and long-term value, even if times get tough.
How can I add value to my property during a recession?
To improve the value of your property during a recession, focus on making cost-effective enhancements that enhance its appeal and functionality. Some ideas include updating common areas, performing regular maintenance, adding amenities, and providing services that cater to the needs of tenants. By implementing these improvements, you can increase the property’s value as well as attract and retain tenants.
What are some tenant retention strategies during a recession?
In order to retain tenants during a recession, it is important to communicate openly with them, address any issues they may have in a timely manner, provide flexible lease options or payment plans for those experiencing financial difficulties, and ensure high-quality customer service and property management. By doing these things, it is possible to keep tenants happy and limit the number of vacant properties during difficult economic circumstances.
When it comes to recession-proof commercial real estate investing, the possibilities are endless. With the current economic climate more unpredictable than ever, there is no better time than now to invest in real estate. Investing in real estate allows you to diversify your assets, take advantage of tax benefits, and secure yourself a steady income stream for years to come.
Therefore, if you’ve been considering investing in commercial real estate, it’s important to ask the right questions and begin researching by talking with lenders, partners, and an experienced leasing agent. That’s where I come in. As a trusted real estate professional I can walk you through all the details of successfully investing in commercial real estate that will best meet your financial needs.
My ultimate goal is to make sure that my clients have access to reliable support from every angle of the process so they know they are equipping themselves for long-term success. Call or schedule a free consultation with me today and let’s get started investing smartly for the future!