Make Your CRE Portfolio Strong to Fight Poor Economic Conditions

David Cohn
Apr 2, 2021
Industry Insights

The pandemic's dramatic economic impacts are underlining the importance of managing commercial property investments proactively to remain agile, moving quickly to mitigate risks or grab opportunities.

Regular reviews and careful planning can increase your chances of withstanding stress tests like the coronavirus and prospering when times get better.

Is it really possible to establish a resilient commercial real estate portfolio that can withstand sudden economic uncertainties?

The answer is yes. Seasoned CRE investors—those who have been in the game for 20 and even 40 years—have managed to remain viable through all kinds of crises before.

The key is to accept that the commercial property market moves in cycles; it has its ups and downs. Creating a portfolio that is recession-resilient means being able to move with the changing tides. Here are some tips on doing that:

1. Maximize your cash flow.

Having a strong and reliable cash flow will help you deal with economic downturns, even when commercial real estate values go down in the short-term.

There are many ways to create a stronger cash flow. Some investors increase their rent to market rate, and others look for new sources of revenue (like charging parking fees or metering utilities separately).

2. Decrease your debt load.

Consider refinancing into a lower interest rate to lessen your debt load. You might also think about paying down some of your biggest loan balances to create more equity that can help you withstand possible declines in the value of your property. Having less debt ultimately expands your cash flow.

3. Improve your overall liquidity.

It's true what they say—cash is king is especially in a time of a recession. Perhaps it's time to unload failing assets that are no longer contributing positively to your CRE investment portfolio. This can increase your liquidity and give you more cash in hand so you can take advantage of investment opportunities when prices drop.

Some investors suggest taking a line of credit against a commercial property where you have substantial equity. It's also crucial to exercise patience and discipline instead of doing deals for the sake of doing something. Preserve your liquidity so that you always have cash on hand for opportunistic deals.

4. Keep an eye out for possible opportunities in different commercial real estate sectors

The coronavirus lockdowns' initial shock in 2020 led to an increase in unpaid rents and higher vacancy rates, but things have since shown signs of stability. The short- and long-term effects of COVID-19 have varied by property sector and region, and there may be some opportunities if you are creative.

Industrial, commercial properties -

There is strong market confidence in the industrial, commercial property sector as big-box warehouses continue to be profitable due to healthy leasing demand.

Many investors are putting money in warehouses that are large enough (at least 500,000 square feet) and well located enough to be leased out to logistics giants such as Wal-Mart and Amazon, which have been some of the best rent payers throughout the pandemic.

It takes about 18 to 24 months to develop a vacant piece of land into a warehouse, keeping that in mind. You don't have to limit yourself to big-box clients, either.

Multi-tenant industrial properties remain viable because as coronavirus restrictions ease up, many small businesses renting them are resuming operations.

Multifamily -

The multifamily sector continues to enjoy positive developer sentiment, particularly in places like California, where renting an apartment is much more affordable than buying or renting a single-detached home. Rent collection during the pandemic remained surprisingly strong, especially among landlords who were proactive about giving tenants extra time to meet their obligations.

Notably, Class A apartments are doing better than Class B and C apartments because tenants in more expensive buildings tend to keep their jobs even during hard times.

While there might be a dip in occupancy rates in the short-term, commercial property investors are confident that people will stay in cities instead of rushing off to the suburbs. Commercial multifamily loans can help you to boost your CRE portfolio.

Offices -

There's been a lot of debate about the long-term outlook for commercial office spaces, but most experts agree that it's far too early to predict what the future holds. In the short-term, most office tenants seem to be paying their rent obligations on time, even though many of their workers are working at home.

Accounting firms and law firms tend to continue paying, but some types of small businesses—particularly travel agencies—tend to close their doors. Analysts say that there are some opportunities in the so-called "new normal" office space.

After all, many people still want to get away from their spouses and kids at home to focus on work in a more structured environment. However, the age of open floor plans might be over in favor of offices that provide private spaces and square footage in between desks.

Student and senior housing -

Short-term losses are expected in the student housing segment. According to some experts, this type of commercial property remains a good commercial real estate investment in the long term.

When schools find a way to reopen safely, students will return and should start paying again. There might even be a demand for private student housing, as some parents don't want their kids to live in crowded dorms. There may also be some opportunities in senior housing.

Well-positioned properties designed to help protect the health of its tenants may become highly in-demand in the long term.

Self-storage -

Seasoned commercial property investors know that self-storage investments take anywhere from 3 to 5 years to achieve stability. This might seem like a long time, but this investment pays off in the long run.

Cash flow issues may challenge some self-storage properties if clients can't make payments, but the long-term fundamentals for this niche remain solid, especially in areas with no overbuilding.

Land -

Even though many economists expect a slowdown in new project development in the coming years, landowners should be insulated, for the most part.

However, zoning issues remain a problem, so make sure you know what you're getting into. If a piece of land is zoned for multifamily development and close to employment centers, then great.

But stay away from properties that are zoned for retail or hotel use in the meantime, as rezoning usually takes years—anywhere from 5 to 20, in fact.

The bottom line is that there could be some opportunities in commercial real estate in 2021 and beyond, depending on your risk tolerance. While it might be too early to start looking for bargains, the fourth quarter of the year may reveal some good deals as pressure and stress build on weaker portfolios.

It's a good idea to be ready. Perhaps it's time to talk to a commercial mortgage consultant so you can be well-positioned to take advantage of deals and build a strong portfolio that can withstand ever-changing economic conditions.