The Azucena Take: Affects of a Recession on the Investment Real Estate Market
Fears of a recession are on every investor's mind. Many still remember what happened in 2008 and will do anything to avoid losing everything. This is understandable but also a dangerous mindset to have as you could make decisions based on panic or fear. This is especially true regarding the investment real estate market. That is why it's important to understand the market and plan accordingly.
This is a look at how the investment real estate market could be affected by a recession based on past and current trends.
When will the Recession Hit?
First, let's get the obvious out of the way, when will the next recession happen? Everyone has their own answer to this question. It could have already happened, we are going through it now, or it could happen in the next one to three years.
It has become difficult to determine when a recession could happen or if it's happening for a number of reasons. Economic numbers don't match up as employment and retail sales are high while unemployment is low. However; inflation is also on the rise followed by interest rates while consumer confidence is on the decline.
Second, don't assume it's going to be like the 2008 crash. That was an economic meltdown that was felt throughout the world. The market conditions are not there for it to happen again. Thus, brace from a recession on par with one from the early 2000's or the 90's.
Investment Real Estate and Recessions
Many investors have been asking will a recession affect their real estate holdings. The answer is not so simple and requires some nuance. Here is a breakdown of how each property has performed during times of recession, including the 2008 crash.
Apartments: This type of property is one of the safest to invest in as it will most likely ride through a recession. In the past, it has taken only a minor hit during times of economic decline. The only exception is during the 2008 crash. It has also seen one of the best returns following times of economic recovery and prosperity.
Retail: This property type always takes a hit during a recession due to a slowdown in sales. It saw a decline during the recessions of the early '80s, '90s, and 2000s while suffering the most during the 2008 crash. However, it's also one of the fastest to recover during times of recovery and prosperity.
Office: It always takes a hit during times of recession and it's always one of the slowest ones to recover. This is due to companies changing their business strategy along with what they need in regards to space.
Industrial: So this property type has become an outlier among experts. Like offices, it always takes a hit during a recession and it's slow to recover. Its unique status comes from recent years as it was hardly affected by the pandemic recession and it spiked earnings for investors.
This also doesn't mean certain properties are 100% recession-proof as other factors do come into play. The biggest one is the market and property type. For example: a suburban office in a primary market might perform better during a recession compared to an urban office in the same market.
What it Means for Investors?
The big takeaway for investors is that a recession will matter to the investment real estate market but not as much as you think. It all comes down to how one's holdings are positioned based on property type, tenants, and its located market. To know how your holdings will handle a recession, speak to a market expert who knows your market.
The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap