How Commercial Real Estate Investors Can Prepare for a Recession
Economist Nouriel Roubini, who accurately forecast the 2008 financial crisis, predicts a “long and ugly” recession in the United States and throughout the world by the end of 2022 that might endure until the end of 2023, as well as a steep correction in the S&P 500.
The Recession definitely has its effects on the commercial real estate industry. For CRE investors, this means that certain precautions need to be put in place whether the prediction is right or wrong.
Like other sectors, the commercial real estate sector is not spared from these effects. A recession can result in commercial real estate investors losing money due to the reduced value of properties or reduced demand for commercial real estate properties.
How can commercial real estate investors adequately prepare for a recession to avoid a significant loss? This article answers that question right after explaining the drastic results of inflation on investments in general and commercial real estate investments.
How can Inflation Affect Investments and Commercial Real Estate Investments?
Inflation is the enemy of investments, and only a few investments are not affected negatively by inflation. In many cases, stock investments may not be as fast-paced as inflation and will not do well when inflation has exceeded the average period of inflation.
While commercial real estate investments are generally recession-proof and investors may even benefit from a recession, real estate investments can decline very fast and put the investors at risk of loss if not properly managed.
One major effect of a recession on commercial real estate investors is a severe decline in demand. When the buying power of people is reduced, the need for commercial properties reduces drastically, too, because not many people can afford landed properties. This does not bode well for commercial real estate investors who have invested their funds in properties hoping to sell or rent them out.
The reduction in demand can lead to properties staying in the market for a long while, which means a loss for commercial real estate investors. The absence of consistent supply can also result in the value of landed properties taking a hit and, consequently, the prices of these properties too.
How to Identify Potential Recession Warning Signs
Are there warning signs of a recession? Unfortunately, recessions are not entirely predictable. There are no forecasters to alert the world of a coming recession. However, there are warning signs that a recession may occur soon.
Also, economists predict recessions all the time, and while they can be wrong, they can also be correct. It is, however, important to recognize when one might occur to build a recession-proof system.
Some of the signs that a recession may occur are highlighted below.
Reduction in Economic Activities
A drastic cut-back in economic growth is the first warning sign that a recession is looming. This is the primary, most apparent cause of recessions. A recession may be inevitable when economic growth is reduced for an extended period. For instance, the COVID-19 pandemic shook the world in 2020, and economic activities decreased to a minimum. Situations like this could lead to a recession.
Low Production Rates
If the rates at which goods are manufactured are low, a recession may occur. When the industrial production rates lessen across the world and for an extended period, it brings the economy to a halt, resulting in a recession.
High Unemployment Rate
An increase in the unemployment rate predicts that a recession may happen soon. When a recession is close, companies and businesses start downsizing the number of their staff or cutting down on working hours to keep up with the cost of running the company. When people are unemployed, they have less money which affects their spending power and this fuels the potential for recession.
Strategies for Successfully Weathering a Recession
Having identified the warning signs of a recession, how can commercial real estate investors stay afloat during a recession? There are different ways through which commercial real estate investors may protect themselves and carry out their business during a recession to keep up with difficult times. The different ways will be explored below.
Commercial real estate investors must reserve liquidity, especially as soon as they sense that a recession will occur. Liquidity refers to how easy it is for assets to be converted to cash without the asset losing its value. During recessions, banks and credit unions either become more unwilling to give out loans or pause on giving loans. As a commercial real estate investor, you want to ensure you have the cash to fund your projects during a recession.
Have a Solid Proactive Team
Investors will find that having a solid team in place during and even before a recession is a blessing to their investments. The first job of your team is to be very proactive. A proactive team will not wait until there is a recession to fix things.
A proactive team will prepare ahead before inflation even happens. Your team must be knowledgeable and constantly educate themselves on the warning signs of inflation and how to navigate inflation when it does occur. Investors are safer when you have a solid team with hands on deck, trying as much as possible to protect investments and maintain investors’ buying power.
A recession is the best time for your team to wear their thinking hats and devise different ways to market commercial properties. Generally, the demand for commercial properties lessens as soon as a recession occurs. This is because the interest rates of mortgage increases and people are more concerned with survival. When this happens, as a commercial real estate investor, it is time to find out ways to market your properties.
Create juicy offers on properties that attract buyers, and double down on advertisement and marketing. Sometimes, you may need to offer your properties at more affordable prices to attract buyers. Whatever marketing may be done to bridge the gap between the demand and supply in real estate should be done.
Develop Strong Ties with Banks and Lenders
Forming and maintaining a relationship with banks and money lenders will help increase your chances of obtaining a loan during a recession. With a bank, it’s best to select a bank with a reputation for working with real estate investors. You can maintain a great relationship with private money lenders by obtaining loans from them and promptly paying up loans obtained. Networking and maintaining good relationships with borrowers is a very important recession-resilient method.
Why it is Important to Have a Solid Team in Place During Difficult Times
As stated above, one of the methods by which one can weather a recession is to have a solid team in place. The importance of having a proactive team cannot be overemphasized. Why should you have a solid team in place?
Commercial real estate investors need a team to make decisions. Tough decisions need to be made in difficult times, and it’s best to have a team on the ground to make these decisions.
Knowledge and Expertise
A formidable team must be set in place to harness enough knowledge about recession and other risks associated with commercial real estate. A knowledgeable team is a proactive one. It is easier to prepare for a recession when there is a team who brings their knowledge and expertise on the economics of commercial real estate to the table.
While weathering a recession can be difficult for commercial real estate investors, it can be adequately managed if the necessary proactive steps are taken. Some of the steps outlined in this article include retaining liquidity, having a solid team, thorough marketing, and developing strong ties with banks and borrowers.
As mentioned earlier, commercial real estate investors as well as mortgage brokers must form and maintain a good relationship with lenders. You can connect with lenders via online marketplaces like Finance Lobby.
Finance Lobby is proprietary software that connects lenders to borrowers. At Finance Lobby, we prioritize lenders and borrowers getting the best fit tailored to meet their unique needs and ensuring that lenders and borrowers have a hitch-free loan transaction.