Is Commercial Real Estate Recession-Proof?
You’ve already heard about how the current cost-of-living crisis and possible impending recession have impacted mortgage loans for homebuyers in the United States. (The current average rate for a 30-year fixed mortgage is a whopping 7.32%, making buying a new home unaffordable for many Americans.)
But what about commercial real estate? Has the economic climate made it more challenging to invest in commercial properties? Will tenants be able to afford rental payments if a recession does happen? What does the future hold for investors?
This guide examines the current state of the commercial real estate market in the U.S. — a sector that’s long been considered “recession-proof.”
Commercial vs. Residential Real Estate
Commercial real estate can often generate higher returns than residential real estate. That’s because commercial properties tend to be bigger than residential ones, and more space means more tenants paying rental income. Commercial properties typically have longer lease terms, meaning finding suitable tenants between lease periods happens less often. Tenants can continue to pay rent for five to 10 years in commercial units compared to six to 12 months in residential units.
However, these benefits apply to non-recession periods. A sudden change in the economic outlook can make commercial properties as much of risky an investment as residential properties. Many small business owners lease commercial units, and a recession can put those tenants out of business. If the business owner only has money to pay their residential or commercial rent, they will almost always choose residential.
Investor Junkie says:
“People need a place to live no matter what the economy is doing. And when there’s a downturn, residential property owners don’t suffer as much or as quickly. Renters prioritize paying rent to ensure they have a place to call home.”
Commercial real estate can generate significant losses if renters default on rental payments and investors can’t find new tenants. In the previous two recessions, many commercial investors couldn’t maintain their portfolios, and it took years for them to recover.
Is Commercial Real Estate Recession-Proof?
Not all commercial real estate will fair well in a recession. Research suggests certain commercial property types are more recession-proof than others. In the last two recessions (2001 and 2008–9), multifamily properties with five or more units outperformed industrial and office properties. Negative growth trends were more pronounced for industrial and office than multifamily, making it far more robust during and after these recessions.
Forbes magazine says:
“Whether you look at negative growth trends, return to prior peak, or growth past prior peak, it’s not even close. Commercial multifamily real estate far outperforms other commercial real estate asset classes.”
Break this data down further, and it’s clear multifamily apartments (compared to homes) are the most recession-proof property type. In the previous two recessions, apartments had the highest returns overall in long-term holding periods.
What does this all mean for investors? Investing in an economic downturn comes with risks for all property types. However, multifamily homes — in particular, multifamily apartments — could continue to generate returns and recover quickly after a possible looming recession has passed.
Other Problems Facing Commercial Investors
The same problems exist for commercial investors as they do for residential ones. The Federal Reserve has increased interest rates, making mortgage loans and other financial products more expensive for those who want to invest in commercial real estate.
While some investors might want to “wait it out,” securing finance and investing in a commercial unit now can still prove lucrative because it allows buyers to either expand their portfolios or make their first step on the property ladder. Any economic downtown is transient, and commercial property owners can continue to profit from rental income when the landscape improves.
It might also make financial sense for an investor to lock in a higher mortgage interest rate now rather than wait any longer. Experts predict the Federal Reserve will raise interest rates again before the end of the year. If a recession does happen, it will be even more expensive to finance a property.
Tips for Commercial Property Investors
Here are some ways commercial real estate investors can make their investments more recession-proof:
- Find commercial properties in hot property markets that a slump in the economy is less likely to impact. Although these properties might require a higher down payment and monthly repayments, they could continue to generate cash flow and even increase in value during a possible recession.
- Avoid investing in spec projects that are currently undergoing construction. Developers might experience financial difficulties during a recession and put these projects on hold, prohibiting you from leasing units and generating rental income.
- Ask tenants to contact you immediately if they experience financial difficulties and cannot pay rent. Renegotiating lease agreements might mean tenants pay a reduced rental rate for a while. However, you will still be able to generate rental income until the economy improves.
- Consider refinancing any existing commercial property investments if mortgage interest rises again. Locking in a new fixed-term rate now could prove beneficial if a recession happens in the coming months, as some experts predict.
- Use a platform like ProspectNow to uncover the best investment opportunities during an economic downturn and discover off-market commercial properties not listed elsewhere on the internet.
Use ProspectNow to Uncover the Best Properties
Regardless of the economic climate, competition can be fierce for commercial units — especially in hot property markets. However, finding the most lucrative properties can be challenging.
ProspectNow is a database that lists every property in the U.S., allowing investors to discover real estate classes and property types that will continue to prove profitable — or at the least, remain stable — in the current economic situation. Use Prospect Now’s predictive analytics to find the latest sales, loan origination, and property ownership data and discover comparables for commercial units that help you make better investment decisions. You can contact commercial property owners directly about off-market opportunities and secure the best teams before anyone else.
ProspectNow had helped thousands of investors find unlisted and off-market commercial properties since 2008 — when the last recession happened. There is no multiple listing service (MLS) for commercial properties, making ProspectNow an incredible resource for investors everywhere.
The current economic crisis and possible recession could impact commercial investors as much as residential ones. While commercial real estate is certainly not “recession-proof,” investing in certain real estate classes and property types provides investors with more significant opportunities to generate returns shortly. ProspectNow makes it easier to find the best investment off-market opportunities during an economic downturn by providing in-depth data about every property in the U.S.
Start your free trial of ProspectNow now and make your investments more recession-proof!