Future-Proofing Your Commercial Real Estate Business for a Potential Recession
How would a recession impact the commercial real estate market? Prepare your portfolio for the unpredictable with help from the experts at Dottid.
The Covid-19 pandemic and resulting economic fallout impacted every sector of the business world. Service industries pivoted to online ordering and contactless fulfillment, office spaces adopted open or shared layouts to account for hybrid schedules, and landlords offered flexible leases to ease tenants’ worries about the future. What happens in a recession—to real estate, investment trends, and other spending—is generally predictable, so why not take steps to prepare now?
For the commercial real estate industry, recovery has been swift but not complete—deals have slowed although asset performance has bounced back considerably. Growing interest rates, unprecedented inflation, and worker shortages are concerning to many commercial real estate owners, managers, and brokers. But while deals may fall short during challenging times, implementing the right strategy can help recession-proof your business and prime it for growth during economic hardship.
What happens to the real estate market during a recession?
Leading up to the 2008 recession, commercial real estate prices increased by 66% before crashing 40% during the crisis. Today, CRE prices have increased even further—111%, to be exact. What happens to real estate when interest rates rise? This rapid hike in prices likely means an even bigger drop in the industry’s future.
The key to surviving (and potentially thriving) during a commercial real estate bubble burst is knowing where to focus your energy and funds. A recession means customers will be shopping less, dining out less frequently, and skimping on entertainment expenses. This can lead to a decrease in property value for landlords and owners renting to tenants in these industries. Reduced revenue for these businesses can also lead to unpaid rent, fewer commercial leases, or even evictions.
So, how should commercial real estate owners evolve to meet changing needs during economic crises?
Recession-proof your CRE operation with a SWOT analysis.
An integral component of any business owner’s tool kit, the SWOT analysis breaks down strengths, weaknesses, opportunities, and threats faced by your operation. The results of these analyses help you make informed decisions during unstable economic conditions. We’ll break down the steps of this process so you can determine what you’re already doing well, and what parts of your business could use improvement to weather the impact of a recession on commercial real estate.
Strengths: Focus on what you know your portfolio and its managers do well. This is the moment to humble brag—maybe your property manager has 30+ years of commercial real estate experience, or the businesses in your portfolio maintain a loyal customer base. Knowing these strengths can help build confidence and bring on potential investors.
Weaknesses: Knowing where your operation could improve helps determine action items to prepare for hard times. Some common weaknesses discovered in this part of the process include business debt, low capital, inexperienced managers, undesirable locations, and more. *Expert tip: The weakness stage of a SWOT analysis is not a time for finding solutions—save those for the opportunities phase and simply focus on finding any imperfections during this stage.
Opportunities: Building on the strengths and weaknesses you’ve discovered, choose some opportunities to create next steps for your business. Do you have strengths you aren’t making the most of? Could you implement an obvious solution to one of your weaknesses? During a recession, when new tenants can be few and far between, profits decrease, and deals slow down, get creative about these opportunities. Add features in the metaverse, offer virtual tours and leasing experiences, or otherwise pivot to meet demands for new types of service. *Expert tip: Utilize Dottid’s Asset OS to track people, processes, and progress on your opportunities.
Threats: When facing an impending recession, threats may seem easy to identify. Interest rates rise, construction costs increase, rent comes in late, and development slows. Acknowledging these threats means you won’t be surprised when they materialize.
After you’ve completed your SWOT analysis, it’s time to put solutions into action. Use the findings from this internal study to create a new strategy for recession-proofing your business. How will you adapt to face upcoming challenges? How will you leverage your strengths and minimize your weaknesses? And most importantly, what opportunities can you capitalize on?
Is it time to make new CRE investments?
While many investors may shy away from making new deals during a recession, if your strengths and resources align with the current market, it could be a better time than ever. Reduced demand for commercial leases during economic crises often means dropping prices for commercial properties. If you’re well-prepared and your portfolio has been evolving to meet changing consumer demands, an economic downturn could present an opportunity to expand your holdings. Consider the following property types:
Office Buildings
When considering a purchase in this sector, you’ll need to be familiar with the 3 classes of office space.
Class A offices come requisite with updates, centralized locations, and modern building features. Many even offer services like daycare, dining, and on-site workout facilities. They’re outfitted for integrating the newest tech, ensuring they won’t become outdated quickly. These spaces often serve as a place to host customers or partners.
Class B offices can typically be described as average in appearance and capability—while they may be updated and modernized, they don’t boast the same desirable capabilities as Class A buildings. You’ll likely find conference rooms and some form of security in Class B facilities, but they often serve to house non-customer-facing fields like development and creative.
Class C buildings often house small industrial or service organizations like home maintenance companies, landscaping, or construction businesses. These spaces are often bare bones, including a break room but not many other amenities. Investors looking to renovate and move them up to another class commonly buy Class C buildings.
Considering the volatility of office space needs after the Covid-19 pandemic, you want to put some serious thought into an office space purchase. If you have the capital for a Class A venture, it’s likely to continue performing well. But companies that choose to downsize during tough times also create a market for class B and C offices.
Retail Property
The rise of online shopping and the end of the shopping mall era have set an interesting course for retail property heading into a recession. Consumers are focusing on local shopping and experiential retail offerings, and those who’ve evolved with these demands are still finding success in brick-and-mortar operations. If you’re prepared to take on the challenges of the rapidly evolving retail world, you may want to consider purchasing a retail property.
Read more about experiential retail and the evolving world of shopping.
Industrial Property
During a recession, even the golden child e-commerce is likely to suffer in terms of revenue. Historically, Americans simply haven’t shopped as much in times of economic downturn. The good news for industrial property owners, though? It’s not just e-commerce that relies on industrial facilities. Groceries, work uniforms, essential technology and even that newly elusive toilet paper all require infrastructure that takes place in these types of buildings. With the right tenants in place, industrial leases could be a safe bet even in a recession.
*Expert tip: Dottid’s Asset OS has built-in features like slate visualization created just for industrial leasing and asset management.
How to Prepare Your Business for a Recession
The future of commercial real estate is promising, despite whatever economic challenges arise. Real estate has proven to be one of the most stable industries during times of recession, but there are ways to maximize returns and stabilize your investments to withstand economic ebbs and flows.
Choose a location that garners high traffic to keep your business top-of-mind to passers-by. (Looking for location ideas? Find more information on recession-proof cities.) Pay attention to the cash flow of any investment buildings you purchase—those with the most consistent revenue are likely to maintain income during a recession.
*Expert tip: Use Dottid’s CRE platform to track income, leasing status, and overall asset performance all in one place—you’ll be prepared at a glance for anything that comes your way.
Once you’ve chosen your investment properties—or if you’re already running a sizeable portfolio of commercial lease properties—think of a recession as an opportunity to tackle those capital expense projects you’ve been saving for a rainy day. With Dottid’s CapEx Projects tool, you can track upgrades from start to finish in one convenient place. From collecting bids to tracking completion, you can collaborate with everyone involved in a CapEx project.
While an upcoming recession is daunting to any business owner, commercial real estate is a resilient industry. While consumers are taking fewer leisurely shopping trips, their demand for necessities remains stable. Transportation, storage, and delivery of the most basic goods wouldn’t be possible without commercially leased spaces. This may be a great time to upgrade spaces in your portfolio or save that capital to take advantage of the low prices likely to come on new investments.