Market shifts and periods of uncertainty are expected in the cyclical commercial real estate (CRE) market. While it is impossible to predict how economic downturns will impact the CRE market, some assets have been proven to withstand market shifts better than others. And in the midst of rising interest rates, widening cap rates, and supply chain issues, owners and investors are seeking safe opportunities that will drive high returns.
When faced with the potential of declining portfolio performance and values, many investors’ initial response is to consider backing out in order to protect their investments from any further market declines. However, during times of market volatility, focusing on both short- and long-term strategies, reassessing a portfolio’s tolerance for market risk, and identifying opportunities to diversify the portfolio through asset allocation are all strategic moves that should be evaluated.
Read ahead to learn about four assets that have historically performed well during market downturns.
The self-storage sector is considered to be one of the most stable commercial real estate investments. Self-storage is known for providing relatively high yields and lower declines and default ratios in comparison to other asset classes. Today, there are more than 50,000 self-storage facilities in the United States. The global self-storage market is forecast to be worth over 47 billion U.S. dollars by 2024, up from 37 billion U.S. dollars in 2018.
For investors seeking to diversify their portfolios, self storage facilities are attractive because of this stability. During the 2008 recession, it was the only real estate sector that maintained positive growth. And while the NAREIT All Equity Index lost almost 40%, self-storage REITs had a return of 5%, including dividends.
Self-storage properties are able to remain stable even during an economic downturn because the demand for extra space is largely based on life events, such as marriage, divorce, home renovations, downsizing, or relocations. Additionally, storage facilities tend to have “sticky tenants” who are unlikely to relocate their belongings even if rent is less expensive elsewhere because of the time and effort required to move.
Medical Office Buildings
Medical office buildings (MOBs) have increasingly become a popular niche within the healthcare real estate industry. In fact, total investment in MOBs rose from $11.9 billion in 2020 to $17.4 billion in 2021, a sector record. Investors are drawn to the stability of this recession-proof CRE asset and its positive forecast for a continuously strong market performance.
Several other factors make medical office buildings recession-proof including:
- Predictable revenue streams
- Minor vulnerability to reimbursement and regulation changes
- An aging Baby Boomer population
- Sticky tenants
Medical office buildings become an even more attractive investment alternative during market shifts because, unlike other industries, the demand for healthcare and treatment facilities remains strong. This consistent demand helps to insulate medical office buildings against market volatility – especially as people continue to seek medical providers who offer convenience and flexibility.
The senior housing market is evolving and maturing as seniors look for living options that cater more to their lifestyle rather than solely accommodating the nature of their aging. Seniors in the United States are retiring at a staggering rate with an estimated 10,000 Baby Boomers turning 65 years old daily and a prediction that by 2040, more than 80 million people will be over the age of 65. As the number of seniors increases, so too will the demand for housing.
The resiliency of the senior housing sector has driven this asset to be considered a recession-proof CRE asset. As a stable asset class, the senior housing sector does not correlate strongly with any particular economic environment, nor does it heavily depend on a rising real estate market. This is a key reason the senior housing sector has consistently outperformed during market shifts. And the senior housing market shows no signs of slowing down with the anticipation that an additional 986,000 senior living units will be required by 2040.
Nationwide, a growing number of renters are using 30% or more of their income to pay for housing. As a result, there has been a surge in the number of individuals and families in need of affordable housing. When the market shifts, even more people begin to gravitate towards affordable apartment units to take advantage of lower rents and to escape the cost, labor, and upkeep associated with homeownership.
For investors, affordable housing can provide risk-adjusted returns that exceed the market-rate performance. Because of the lack of affordable housing across the nation, affordable communities tend to have high occupancies and low turnover, which increases the property’s net operating income (NOI).
Although the average market-rate multifamily community has an average turnover rate of 50%, affordable portfolios maintain occupancy rates of approximately 98% or higher – a figure that is not likely to decline due to market shifts.
How Lobby CRE Can Help During Market Shifts
Over the next three years, the commercial real estate market is projected to reset expectations to market-based interest rates and pricing. This shift will affect the actions and strategies around cashflow and cost of capital, impacting asset valuations, deal flow, and transactions.
With asset management software, like Lobby CRE, owners and investors can find new opportunities within their portfolios in record time. Having access to information like prime sell and refi opportunities with just a few clicks will allow you to take advantage of opportunities when they are most fruitful for your firm. And with the help of benchmark data, you’ll be able to anticipate new geographic regions to invest in long before your peers.
Having the right asset management solution will give you on-demand access to key insights about your existing portfolio and industry trends to help you make informed, NOI-boosting decisions.
Market volatility is inevitable when investing in today’s changing commercial real estate market. Because there is no sure way to pinpoint when an economic downturn will occur, maintaining a diversified portfolio can help investors overcome market shifts. With today’s current market, considering historically recession-proof assets is a strategic way for investors to optimize their portfolio’s performance.
Watch the webinar, Changing Dynamics in CRE Management, to learn why forward-thinking CRE professionals are turning to new methods to navigate the risks and opportunities of their properties and portfolios as dynamic market conditions create significant change for the commercial real estate industry.