How Should the CRE Industry Prepare for the Next Downturn
A recession is unlikely to hit this year, but experts say that this is the perfect time to reevaluate your portfolio to prepare for when it does.
“Real estate is cyclical and it is impossible to predict exactly when a downturn will happen. Most experts agree that the current economic expansion began in June 2009, and, last summer made it 10 years old, the longest in U.S. history,” Ed Hanley, president of Hanley Investment Group, tells GlobeSt.com. “An economic downturn doesn’t impact every market and every investment the same. So, as the current election year unfolds and whether a downturn is around the corner or not, this is the perfect time to evaluate the current performance of your portfolio and how to best position it for the future.”
A portfolio evaluation can include repairs, preventative maintenance and upgrades, all of which can be essential to tenant retention during a correction. “Properly evaluating making capital expenditures now to retain tenants and stable occupancy levels may put you in a better position for the next downturn or market correction,” says Hanley. “Some mall and regional open-air shopping center owners used the last downturn to make large improvements to reposition their properties to be ready for better economic times and the strategy was very effective.”
Of course, the fundamentals are much different this cycle than at the end of the last cycle, but some of the lessons learned during the last downturn are still important. “In the last cycle, one of the biggest mistakes investors made was being over-leveraged or not having sufficient reserves to weather an economic downturn. Although interest rates remain broadly at historic lows, it is prudent to review current loan terms now to prevent any potential inability to refinance an existing loan in the future,” Bill Asher, EVP at Hanley Investment Group, tells GlobeSt.com. “It’s important to know your break-even point and make sound financial decisions to protect your bottom line and your cash reserves. Some investors were prepared for the last downturn and purchased properties at a deep discount due to having ample equity on the sidelines that remained patient during the previous peak of the last cycle.”
In the world of retail, shopping center owners have a lot of options to take care of current market demand. “As demand and pricing for non-core, grocery-anchored shopping centers slowly wane, a break-up sales plan can help provide an owner with better overall proceeds,” says Asher. “By selling a shopping center in pieces, a seller can realize an improved value compared to selling the entire center as a whole. Furthermore, the pricing of separate, smaller offerings, typically appeals to a much larger buyer pool, which has continued to have the most depth in today’s market.”
The bottom line in surviving a downturn is to prepare for one. “Although we anticipate 2020 will look similar to 2019 in regard to retail investment demand, transaction volume and velocity, by failing to prepare, you are preparing to fail,” says Hanley. “No better time than the present to prepare for what history shows inevitably will come.”