Commercial real estate (CRE) has long been recognized as a valuable asset class resistant to inflation and, in some cases, recession-proof.
But while these properties are often more sturdy than other investments during an economic downturn, this doesn't mean that every CRE investment will make it through a recession unscathed.
What are the most recession-resistant commercial real estate asset categories? Experts agree that four characteristics make a property most likely to succeed during an economic recession: a good location, solid fundamentals and functionality, sufficient cash flow, and modest capital requirements.
In this blog, we talk about four examples of commercial real estate assets that exemplify these characteristics:
Did you know that the senior population spends five times more on medical services than any other generation? With this influx of patient needs, additional healthcare facilities such as medical offices, outpatient clinics, and surgery centers are now necessary.
Think about it. With a median retirement age of 66 years old, approximately 10,000 baby boomers retire daily with little assets.
This suggests that the demand for healthcare services outside a conventional hospital setting is not going anywhere.
Moreover, the demand is expected to increase even further as the Baby Boomer generation—people born between 1946 and 1964—reaches their golden years.
The target market comprising 75 million people will only grow in the upcoming years.
Experts say that even if the economy takes a turn for the worse, MOBs will still appeal to investors because they offer long-term rent upside.
The reason is that there is always a high demand for healthcare services, no matter the state of the economy.
Moreover, tenants of medical office buildings often have excellent credit standing (although each must be evaluated individually, of course).
MOBs with solid and long-term tenants also tend to draw in more business from healthcare providers who want to be situated near similar services.
The opportunities don't end here. In addition, more and more people are turning to alternative medicine, which means a growing need for office space for specialties such as chiropractic, massage therapy, and acupuncturists.
Moreover, more insurance companies are picking up the tab for these treatments, making them more accessible and popular.
So it's not surprising that the number of chiropractors and massage therapists in the United States has increased dramatically over the past decade by 73%.
Overall, the aging population is slowly becoming more wellness-conscious and would rather receive preventative care outside a hospital setting.
Consequently, the demand for non-hospital health providers is on the rise.
The three primary considerations when examining a MOB investment are typically location, tenant roster, and the physical condition of the property. Keep these in mind when evaluating potential projects.
Suburban office space is often overlooked, but many CRE experts believe it deserves serious consideration. There are strong indicators of continued population increase and job growth in secondary and suburban markets even after the pandemic.
Cash flow is often said to be king in real estate investing. However, during a recession, cash flow becomes especially significant.
The greater your income, the better positioned you are to meet expenditures and debt service, even if a portion of your profits are lost for an extended period.
In a recession, an income-oriented, multi-tenant office with credit-quality, long-term tenants (WALT 5+ years) has all of the characteristics of a sturdy asset. Long-term leases benefit landlords—and banks favor them.
Investors interested in this property class must consider the severity of a drop in demand caused by companies that wish to lean into WFH (some people at home permanently, others a day or two each week).
Versus the expected rebound of a long-term densification trend as businesses pack more people into smaller spaces.
It's also important to look at the migratory patterns of the growing millennial market. A recent Marcus & Millichap report suggests that suburban office properties will be the biggest beneficiaries of evolving millennial lifestyles.
More and more millennials are now starting families and searching for suburban neighborhoods with better school systems and affordable housing costs.
As a result, the demand for suburban housing will grow as more people desire this type of lifestyle, which in turn could lead to more companies building corporate campuses in suburbs that have become employment hubs. This is why many experts predict a suburban office boom even if the economy slows.
Unlike hotels, travel, retail, and restaurants which are expected to perform poorly during a recession, self-storage will continue to see demand from customers who are downsizing.
Recession or no recession, life often consists of unfortunate events such as downsizing, divorce, dislocation, and death (sometimes called the four Ds).
These occurrences usually lead to an increased demand for self-storage units.
So long as people downsize, the storage industry will continue to grow.
History certainly seems to indicate this. For example, self-storage real estate investment trusts (REITs) were the only type of real estate asset that was up in the recession of 2008.
Of course, it will not repeat in this cycle, but this asset class is worth looking into.
Investors looked at mobile home parks as an asset class a few years ago. Nowadays, however, these same parks are called the "darling" of CRE.
This is because this asset type can outperform most other investments during periods of economic downturn.
So if you want to position your CRE portfolio defensively in an upcoming recession, consider investing some of your money in mobile home parks.
There are no new supply options for mobile home parks because of the tight regulations.
In contrast, 350,000 new units of apartment buildings were constructed last year, making it clear that there's a never-ending supply of new competition in this segment.
In contrast, mobile home parks decreased (as some were converted into other uses).
The demand for affordable housing is unending. The numbers don't lie.
Almost half of U.S. wage earners make less than $32,000 annually, while the median retirement savings is a measly $5,000. To pile on top of that, 10,000 baby boomers are retiring daily.
This is why many CRE experts think there will always be a need for cheap housing in America.
Here's even better news for investors: Mobile home parks continue to attract long-term residents because they provide a sense of security and familiarity.
This is especially true since many renters have been rejected or abducted, necessitating a heightened awareness of personal safety among park users.
However, due to the low cost of living in most mobile homes and the fact that rent is very cheap, it's difficult for tenants to leave their mobile home park for a competing property.
The tenant generally owns their own house (the park rents them the land), and moving a mobile home costs about $6,000.
With the economy in turmoil, it's essential to find stable investments to help your portfolio weather the storm.
The asset classes listed above perform well during economic downturns for various reasons.
But they all share one characteristic: They all provide a service unaffected by the economy or even grow in popularity as the economy declines.
If you are exploring funding for a recession-resistant CRE project, contact Capital Investors Direct.
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