Preparing for an Economic Slowdown as a CRE Investor
Earlier this year, the economic recovery in the United States hit the ten-year mark, becoming the longest period in history without an economic recession. It feels like it is in the 16th inning of Game 7 of the MLB World Series and no one wants it to end. Despite this growth, the economy is starting to cool and commercial real estate investors should begin planning for an economic decline.
Markets are cyclical so to expect a downturn in the future isn’t pessimistic, it’s realistic. Savvy investors will know the warning signs and will be well prepared when the economy does cool. Duke University’s Fuqua Business School reports that 86% of surveyed Chief Financial Officers expect a recession in 2020. Quickly escalating real estate prices, a slowing economy and policy changes are all warning signs that a downturn is on the horizon, and economists say that we are currently in the “late stable” stage of real estate.
Here are a few tips on how to plan for the next economic slowdown:
1) Stockpile Your Cash: The one silver lining of a recession? Real estate gets cheap. As long as you’re not over-leveraged and you have some cash in reserve, you’ve got a great opportunity to grow your investment portfolio and purchase real estate at a very discounted rate.
2) Implement Long-Term Leases: During a recession, rentals become of utmost importance in the real estate market, as many people can no longer afford to own a property. If you already have rentals in your portfolio, consider asking your tenants to sign a long-term lease. With qualified tenants occupying your properties through the worst of the recession you’ll be able to preserve both your capital and income.
3) Focus on Multifamily Properties: There isn’t a sector of commercial real estate that is “recession-proof” but the multifamily sector comes close. The Great Recession of 2008 led to layoffs and foreclosures, forcing many homeowners to look for lower cost housing. Everyone needs a place to live, and the demand for apartments increases during a recession, meaning that an investment in multifamily could lead to a profit even during a downturn.
Nothing is certain when it comes to the economy and the commercial real estate market but being prepared and having contingency plans are necessary to stay afloat if and when the market takes a turn.
Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.