7 Tips to Keep Your Office Portfolio Recession-Proof
Is office safe in a recession? Find out some steps you can take to ensure your commercial real estate portfolio weathers what's on the horizon.
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It's no secret that the economy goes through cyclical ups and downs over time, and the real estate market is no different. Some commercial real estate investments can be particularly vulnerable to swings in the economy — office among them. Following the major shift toward remote work in recent years, office real estate has become particularly vulnerable to changing economic conditions.
Is office safe in a recession? It depends. This is not to say office properties are bad investments — on the contrary, there are phenomenal investment opportunities within the sector. However, not every office property is well positioned to perform in the next downturn. And depending on your property and market, now may not be the best time to sell your property, either.
This article discusses seven tips investors can use to keep the office components of their investment portfolios going strong.
Keep a Diverse Tenant Mix
When the economy is souring, many companies look for ways to tighten their belts. One of the most common ways a business can save money is by reducing its size. This isn’t just talking about layoffs. If a business can handle operations by shifting half its workforce to working from home, they can potentially save serious money on their leasing costs.
As an office landlord, you may think there’s not a lot you can do about this. But the fact is, keeping a diverse tenant mix is a key in mitigating risk here. After all, not every company needs to downsize during a recession. Some even expand — just look at Netflix in the past couple downturns, if you need a good example.
But you don’t have to have the next Netflix in your building to keep your office investment afloat during tough times. It’s often enough to have several tenants of varying sizes and in various industries. This way your vacancy costs are far less likely to skyrocket when one company downsizes.
Allow for Flexible Lease Terms
This may seem counterintuitive, but think about it from a tenant perspective. If your business’s lease is up for renewal and you see headwinds on the horizon, which is better: A strict, five- or seven-year lease with no flexibility, or a shorter-term lease with some possibility to adjust the terms based on your needs? Tenants facing potential challenges will broadly opt for the latter category.
Retention is the absolute key to ensuring your office property remains profitable in a recession. If you’ve tried to market empty space in a recession, you’ll know this truth for what it is. Keeping flexible is essential to keeping your tenants happy, and this will do wonders for keeping vacancy down.
Note thatI’m not talking about turning your property into a coworking site, though. Flexibility can be an asset, but if you’re too flexible, you could open yourself up to greater risks.
Invest in Amenities
Which office properties do you think are more likely to draw employees in, even with work-from-home policies in place?
Option A: a standard office space with desks and a meeting room
Option B: a suite in a building with a café, bicycle parking, and a fitness center?
Hint: It’s not Option A. Even so, many office investors tend to look at amenities as something extra. The truth is, amenitized office space has been shown to pull more people into a company’s workspace.
Of course, this does have a limit, and you have to consider costs. Don’t invest in adding and maintaining a zen garden at your property and expect to be able to boost your leasing rates. It doesn’t work that way.
Instead, look at what your competitor properties are doing. What amenities are common in your market? Which of these is your asset lacking? Sometimes, even creating community space — a picnic table area outside, for example — can do wonders by drawing people to their workspace at very little cost. This, in turn, can lead to better retention when your tenant’s lease comes up for renewal.
Implement Smart Building Tech
There’s a lot of really cool proptech that can help both you and your tenants save on costs. Smart technology can ensure heating or air conditioning systems are utilized only when necessary, lowering everyone’s energy costs. Other proptech can reduce your property management costs, if a tenant can tap a few buttons to submit a maintenance request.
Besides what most people think of as “smart” technology, even something as seemingly minor as replacing interior and exterior lighting with LED bulbs can have a huge impact on lowering your property’s energy costs. This doesn’t just lead to lower bills, but it’s also linked to higher office leasing renewal rates. Remember: It’s all about retention.
Be Proactive With Financing
Unless you bought your office property with cash, you likely have some debt to service. And if your financing has a floating interest rate, this can open you up to significantly higher loan payments when rates are on the rise.
Take a look at your current financing package. When will you need to refinance? If it’s five or six years out and you’ve got a nice, fixed-rate loan you’re happy with, then you can probably relax. If you’ve got a variable-rate mortgage maturing in the next couple years, though, it’s time to take a serious look at your refinancing options.
When interest rates are fluctuating, you’re opening yourself up to serious risk. By locking in a fixed rate on a refinance, you know exactly what to expect for the life of the loan, even should the economy head south.
That said, do be careful of any prepayment penalty associated with your current loan. If you have to pay a hefty fee to pay down your existing debt, you may think a refi doesn’t make sense. Run the numbers, though — find out for yourself what the best option is.
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Don’t Defer Property Maintenance
This one should be obvious. If you have deferred maintenance at your office property, stop deferring and get the work done. Pay for it now, because your cash flows may take a hit as we enter a recession. And if you can’t keep your property fully operational during a downturn, expect that to directly translate into higher tenant turnover and lower returns.
And if you don’t have the capital on hand to do it now, look into a small loan. (Yes, we quote those, too.) Being proactive makes financial sense, and it also signals to your tenants that you’ll take care of them — even when it isn’t convenient for you as a landlord.
Research Your Market
You know you need to research your local office market before making an acquisition or disposition, of course. But part of your investment strategy should be regularly assessing the market. By taking stock of ongoing trends in the office sector, you’ll be much better prepared to keep your office property full when times are tough.
What do I mean by that? I’ve alluded to it a few times throughout this piece. Remember assessing your amenities with your competitors? That’s just one way. The same goes with leasing flexibility, building tech, and even property maintenance. If you don’t know the crowd, how can you ensure your property stands out from it?
Beyond using market research to drive your property operations, it can also drive realistic expectations. If office vacancy in your metro is ballooning, regardless of where an asset falls on the quality spectrum, you may need to have a serious look at how well your property can fare.
It’s easy for people to say that office real estate is a bad bet right now. The truth is, it depends on the asset, the market, and how well managed the property is. Now certainly isn’t the best time to jump into office investment with no experience, for sure. But if you already have office assets in your portfolio, you can realize significant investment upside — even during a recession.
Oh, and if you’re curious about the refinancing bit earlier on? Fill in the form below, and we’ll get you a bunch of free quotes within 24 hours, free of charge. Can’t hurt to see your options, after all.