Best Commercial Real Estate Assets to Invest in During a Recession

David Cohn
Oct 8, 2022

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:

  1. Medical office buildings (MOBs)
  2. Multi-tenant offices in high-growth suburban locations
  3. Self-storage facilities
  4. Mobile home parks

1. Medical office buildings

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.

Benefits of MOB investments at a glance:

  • Growing demand - The aging baby boomer population is growing, and thus the need for more medical office buildings (MOB) will increase.
  • Financially stable tenants - MOB tenants typically have strong credit scores.
  • Long-term occupancy - CBRE shows that medical office vacancy rates have always been below the average for all offices. In addition, medical office portfolios experienced little to no occupancy change between 2020 and 2021 (during the height of the epidemic).
  • Diverse pool or potential tenants – MOBs can be rented by primary doctors, dentists, women's wellness centers, plastic surgeons, urgent care facilities, psychiatrists, etc.
  • Essential – The medical workforce is considered essential, so this industry should be resilient against work-from-home trends
  • Beneficial tax treatment - Investing in a MOB can help you accelerate depreciation and save on taxes.

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.

2. Multi-tenant office buildings in high-growth suburban markets

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.

Benefits of multi-tenant office buildings at a glance

  • Job and population growth - The population is increasing, and jobs are growing in suburban areas as people move out of densely populated cities. Because of the success of the work-from-home trend, many people now want to either work at home or live close to work to have more time for their families.
  • Stable income - Longer-term leases produce immediate and continuous cash flow.

3. Self-storage facilities

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.

Benefits of investing in self-storage buildings at a glance

  • Large industry - According to IBISWorld, the self-storage market's yearly revenue was $39.5 billion in 2019. Industry earnings have been growing at a rapid 3.6% per year since 2010, making self-storage one of the country's fastest-growing sectors.
  • Steady Rent – Self-storage tenants are not very price-sensitive. They also tend to stay longer, as switching to a new location often involves high costs.
  • Potential ancillary income – There are significant opportunities to offer packaging services and supplies, valet storage, truck and removal services, etc.
  • Low maintenance – Self-storage facilities are easy to manage and take care of. As a result, unit reconfigurations are simple, and staffing costs tend to be low.
  • Adaptability – This type of CRE benefits from an easy eviction process and flexible lease terms.

4. Mobile Home Parks

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.

Benefits of investing in mobile home parks at a glance

  • Recession resistant - Mobile home parks have historically been steady in all cycles.
  • Increased demand - The affordable housing crisis equates to more need in this segment.
  • Low operating Costs - This type of CRE investment requires low maintenance and low capital expenses

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.