How to Hedge Against the Downside As the Cycle Matures

There is rising concern about an upcoming recession in the next 12 months. Despite the changing sentiment, many investors are staying in buy mode this year but are developing plans to hedge against the downside, should an economic downturn hit in the next 12 months. Creating a long-term strategy and a business plan to hold through the next cycle are two ways that some investors are hedging against the downside while remaining net buyers this year.

“We look at property for the long term, so we have a slightly different perspective than funds and REITS,” Robert Held, CEO Held Properties, tells GlobeSt.com. “We are layering our properties to ensure that we have no major lease up exposure in our portfolio for the next five years.   Our financing for the properties are now all 10-year term, fixed rate, with some to all interest only to maximize return and minimize interest rate risk.”

A strong tenant mix is another strategy to mitigate risk before a potential downturn. Held recently acquired a 125,000-square-foot office building in Arizona. The property was a good fit because of the strong tenant profiles that could weather a storm. “We just acquired class-A high tech bioscience and creative office building in Chandler, Arizona, in a 1031 Exchange from  the sales proceeds of a 67,000-square-foot building in North San Jose, CA,” he says. “The building, San Tan Tech Center is 99% leased providing  little, if any lease up exposure for at least the next three years.  Our prospective tenants are more seasoned, with a better balance sheet, and in general more capable of weathering a dip in the economy.”

In 2019, Held is remaining a net buyer and will wait for the signs of a shifting economy to slow investment activity. He thinks there are still opportunities in the market and doesn’t expect a recession this year. “While next year should begin to show some signs of stress,  I am a net buyer for the near future.  I will adjust my expectations when the economy shows signs of continued weakening, the markets in which we invest are over saturated, interest rates rise faster than cap rates, and the risk associated with an acquisition is greater than the reward.  Barring anything unusual, this year looks to be promising,” he says. “Next year should also be an investing year for us. Although, I am hopeful that the election year politics will overshadow the stress on the horizon.”