What type of commercial RE is most recession proof?

Question

From what I've been told, one of the main drawbacks of investing in commercial real estate is that it is hit harder by recessions than other RE types.

What types of commercial are less risky? I would guess apartment complexes and hotels. Would I be correct?

John Warren · Answer

@Patrick Philip the common wisdom is that apartment buildings are the least risky of the commercial investments. This can also be seen in the fact that most banks and lending institutions provide greater leverage for the purchase of apartments. With that being said, I think the least risky investment is the on you understand the best. There are definitely players in all of the commercial spaces who are going to do great no matter what type of asset class they are in. I personally am an apartment guy. I will "stay in my lane" and will not be buying commercial buildings, officer buildings, self storage, etc. Primarily, this is because I know apartments and I know how not to lose.

Tommy Chan · Answer

QSR, Datacenter, Warehouses

Tom Makinen · Answer

NNN on a Mickey D's at a good location?

Joel Owens · Answer

The key with big box is what would go there. Fitness gym, church, self storage facility, antique mall, etc.

When you look at buying a vacant box size you have to calculate what rent the new tenants would pay per ft and what cap rate that would be NNN. Old buildings like that can take a ton of TI and also deferred maintenance. Some cold and mid belt states large boxes can sit for years. In warm belt states in strong areas some can get re-tenanted in 6 months to 1 year. in the mean time they throw a party city in there, Halloween store, Christmas store, etc. to try and bring in enough rent to cover overhead and property taxes until they land a long term tenant.

I cater more toward the high net worth to ultra high net worth individual investor that buys retail. Big  box is more left to the REIT's, insurance companies, and pension funds that can buy in bulk and if one store goes dark they can portfolio average the rest to stay profitable. If you are one investor with a net worth of 10 million plopping down 3 million to 3.5 to own a Best Buy that doesn't really make sense. My clients tend to want to buy a new neighborhood retail strip center in a strong area with multiple tenants and service oriented business types for 5 to 8 million in price instead.

Lesley Resnick · Answer

Cash reserves.  By that, I mean a plan for what you will do with the asset in a down market.  Every asset class has its day in the sun and will also face a liquidity problem.  Do you have sufficient reserves to cover a shortfall?

Some asset classes have a minimum rental floor others do not.

While it is questionable and may be debated, In my opinion, SFH has a minimum value and can always be rented below market.  Making them the most recession-proof asset class.  Tenants will be willing to move up an asset class for the price of the lower asset.

Multifamily is inherently more transient, outside of a few cities, people do not dream of raising their family in a highrise.  All things being equal, people want their own driveway and yard.

On the other side of the equation, when large-scale A level retail goes bad, it is difficult to recover.  How many old K-mart are in your area?  Old circuit city stores?  I have seen owners offering this property for the cost of the taxes.  They have given rise to the pop-up stores, the Haloween shops.  There are few renters who can support a store of the size and most of them have saturated the market, Lowes, Homedepot, Best Buy, etc.

I am not sure about hotels and self-storage, I could envision scenarios where each could do well or suffer.  While technically a RE asset, they are dependent on being an active business to generate income.

Mike Krieg · Answer

By that data self storage performs the best, then mobile home parks, then multifamily. Not a lot of daylight between them however. This is what the broad national data suggests when you study recent recessions. I would add a caveat however, a deal well done, in any class, will protect you in any market. A bad self storage deal, etc...you get the picture; all bets are off.

Joel Owens · Answer

There are multiple factors with risk. Commercial is not the most risk. It is simply an asset class among many out there. Doesn't matter if it's residential, multifamily, land development, office, retail, self storage, etc. you can lose your shirt if you buy wrong going in.

Now some people less experienced can buy at the bottom of a cycle knowing very little and let timing and cap compression bail them out. To replicate that on a consistent basis is not a good business plan.

People I know worth 8 to 9 figures have been investing in a niche for decades and regardless of cycle know how invest to curb risk. They might occasionally break even or lose on one project but in a small way and then win most of the other times. So their portfolio averaging and investing is usually always rising for net worth.

Ronald Rohde · Answer

The intuitive theory is that a recession causes more people to transition housing, whether evicted, short sale or just downsizing therefore they tend to store more stuff. I agree with it in theory, but like everything else comes down to the individual execution. A great plan poorly executed is worth a lot less than a mediocre plan executed perfectly.

Alina Trigub · Answer

@Patrick Philip Your investment will be recession-proof if it's underwritten conservatively. But as @John Warren stated, you have to know your niche really well and understand what you're getting yourself into. I've seen some research saying that storages are one of the more conservative investments, however again - it will all depend on how it is underwritten, whether the market shows the demand for it, and the break-even point is much lower than your asset may anticipate to a recession hit.

Ellie Perlman · Answer

Not sure about hotels. I believe they have higher cap rates than MF, but bear a higher risk (especially at this point in the cycle)

What type of commercial RE is most recession proof?

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