6 Ways CRE Investors Can Prepare for a Recession
With heightened volatility in the capital markets, here are six ways commercial real estate investors can prepare for a potential recession.
Apply for a loan in minutes and get multiple quotes today → Get Quotes
As the saying goes, the only certainties in life are death and taxes. But if we had to add a third certainty, it would be that there will always be another recession. The commercial real estate industry is no stranger to economic downturns; in fact, it was one of the hardest-hit sectors during the Great Recession. However, there are steps that CRE investors can take to weather the upcoming storm. Read on to find out more about what you need to do to get more recession-resistant.
1. Diversify Your Portfolio
When it comes to investing, diversification is key. That's especially true in CRE, where properties can be very sensitive to economic conditions. By diversifying your portfolio — both in terms of asset type and geographic location — you'll be better positioned to work against headwinds. For example, if you have all your assets tied up in office buildings in downtown Chicago, and the next recession hits, you'll be in for a world of hurt. However, if you own a mix of office, multifamily, retail, and industrial properties across multiple markets, you'll be much better off.
2. Focus on Key Fundamentals
In CRE, as with any other investment, it's important to focus on properties with strong fundamentals — such as location, size, and tenant mix — that will hold up in good times and bad. In other words, don't overpay for a property just because you think you can flip it quickly for a profit; that strategy is more likely to lead to financial disaster than anything else.
By focusing on key property and market fundamentals and taking a long-term view of your investments, you'll be better equipped to weather economic downturns. Make sure that you don't sacrifice long-term stability for short-term gains; always structure your deals in a way that makes sense from a risk/reward standpoint.
3. Have Ample Liquidity Available
Liquidity is important for any investor, but it becomes even more vital during periods of economic turmoil. While this doesn’t necessarily mean that you should keep large amounts of cash on hand, you should make sure that you have access to cash if needed — for example through lines of credit. However, it should be noted that some banks close lines of credit if they think a borrower is high risk. To avoid this, make sure you don’t go to lenders you typically use for commercial lending, a Commercial Property Executive article noted.
4. Revisit Your Financing Arrangements
During periods of economic uncertainty, lenders tend to tighten up their underwriting standards. So it's important to make sure that your financing arrangements are still appropriate for your needs. If necessary, explore alternative financing options — such as private equity or mezzanine debt — to make sure you're not unnecessarily exposed to risk. And always remember: it's better to have too much liquidity than too little!
5. Work With Your Lender and Renegotiate Loan Terms
If your loan is already in trouble, you have a maturity date coming up, or if you're anticipating difficulties making payments, reach out to your lender to discuss your options. If you have good credit, you may be able to renegotiate the terms of your loan, including the interest rate and repayment schedule. This can make it easier to keep up with payments during a recession.
6. Manage Your Expenses Carefully
As with any business venture, it's important to control your expenses during periods of economic uncertainty. Take a close look at your operating expenses and see if there are any areas where you can cut back without compromising your business. This will help ensure that your business is better positioned to weather any economic storms that may come your way.
Final Thoughts
While there's no guaranteed way to avoid losses during an economic downturn, there are certain strategies that can help minimize risk. By diversifying your property types, considering alternative investments, reviewing your debt structure, and increasing your cash reserves, you'll be in a better position to weather any potential storms on the horizon.
Related Questions
What strategies can commercial real estate investors use to protect their investments during a recession?
When it comes to protecting investments during a recession, commercial real estate investors should focus on diversifying their portfolio, considering alternative investments, reviewing their debt structure, and increasing their cash reserves.
Diversifying your portfolio is key. This means having a mix of asset types and geographic locations. For example, if you have all your assets tied up in office buildings in downtown Chicago, and the next recession hits, you'll be in for a world of hurt. However, if you own a mix of office, multifamily, retail, and industrial properties across multiple markets, you'll be much better off.
Alternative investments can also help protect your investments during a recession. These include investments in real estate-related securities, such as REITs, mortgage-backed securities, and other real estate-related investments.
Reviewing your debt structure is also important. During a recession, lenders may be less willing to lend, so it's important to make sure you have a debt structure that is flexible and can be adjusted if needed.
Finally, increasing your cash reserves can help protect your investments during a recession. Having a larger cash reserve will give you more flexibility to weather any potential storms on the horizon.
What are the best ways to reduce risk in commercial real estate investments?
The best ways to reduce risk in commercial real estate investments are to diversify your property types, consider alternative investments, review your debt structure, and increase your cash reserves.
Diversifying your property types can help spread out your risk. Consider investing in different types of properties, such as office buildings, retail stores, and industrial warehouses. This will help you spread out your risk and potentially increase your returns.
Alternative investments can also help reduce risk. Consider investing in real estate-related investments such as REITs, mortgage-backed securities, and real estate crowdfunding. These investments can provide a steady stream of income and help reduce your overall risk.
Reviewing your debt structure is also important. Make sure you understand the terms of your loan and the interest rate you are paying. You may be able to refinance your loan to get a lower interest rate or extend the term of the loan to reduce your monthly payments.
Finally, increasing your cash reserves can help reduce risk. Having a cash reserve can help you cover unexpected expenses or take advantage of opportunities that arise. Having a cash reserve can also help you weather any potential economic downturns.
How can commercial real estate investors prepare for a recession?
Commercial real estate investors can prepare for a recession by diversifying their property types, considering alternative investments, reviewing their debt structure, increasing their cash reserves, and managing their expenses carefully.
Diversifying property types can help spread out risk and reduce the impact of a downturn in one particular sector. Alternative investments, such as private equity, can also provide a hedge against market volatility. Reviewing debt structure can help investors identify areas where they can reduce their exposure to risk. Increasing cash reserves can provide a cushion in the event of a downturn. Finally, managing expenses carefully can help ensure that the business is better positioned to weather any economic storms that may come its way.
What are the most important factors to consider when investing in commercial real estate during a recession?
When investing in commercial real estate during a recession, it is important to focus on properties with strong fundamentals such as location, size, and tenant mix. This will help ensure that the property will hold up in good times and bad. Additionally, it is important to have ample liquidity available, such as through lines of credit, in case of an emergency. However, it is important to note that some banks may close lines of credit if they think a borrower is high risk, so it is important to not go to lenders typically used for commercial lending.
Sources:
What are the benefits of investing in commercial real estate during a recession?
Investing in commercial real estate during a recession can be a great way to take advantage of lower prices and increased opportunities. During a recession, many investors are hesitant to invest in real estate, which can lead to lower prices and more attractive deals. Additionally, during a recession, there may be more opportunities to purchase distressed properties at a discount, which can be a great way to build a portfolio of income-producing assets.
In addition to the potential for lower prices and more attractive deals, investing in commercial real estate during a recession can also provide a hedge against inflation. Real estate is a tangible asset, and its value tends to increase over time, even during periods of economic downturn. This can provide a hedge against inflation, as the value of the asset will increase even if the value of the currency decreases.
Finally, investing in commercial real estate during a recession can provide a steady source of income. Many commercial real estate investments are structured as long-term leases, which can provide a steady stream of income even during periods of economic downturn. Additionally, many lenders offer fixed-rate loans, which can provide a stable source of financing even during periods of economic uncertainty.
In summary, investing in commercial real estate during a recession can be a great way to take advantage of lower prices and increased opportunities, provide a hedge against inflation, and provide a steady source of income. For more information on fixed-rate loans and other financing options, please visit our blog.
What are the best strategies for financing commercial real estate investments during a recession?
The best strategies for financing commercial real estate investments during a recession are to diversify your property types, consider alternative investments, review your debt structure, and increase your cash reserves. Additionally, it's important to make sure that your financing arrangements are still appropriate for your needs and explore alternative financing options such as private equity or mezzanine debt to make sure you're not unnecessarily exposed to risk. It's better to have too much liquidity than too little!