Make the Most of a Recession: Investing in Real Estate for Stability
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
Nearly 50% of Americans believe a recession could be on the horizon, and several experts agree, according to Trionproperties.com. Recessions are a necessary part of the business cycle, but their effects can wreak havoc on consumers and investors alike. In an inflationary environment, real estate has historically performed well, although, over the longer term, it has been outperformed quite impressively by stock prices, as an asset class.
What Is Most Important When Selecting Portfolio Assets?
If you are an investor looking to weather a recession, there are certain types of real estate investments that may be better suited for the purpose. The most important factors in selecting the right investment mix are understanding the current economic environment and your own risk tolerance.
What is Best to Hold in a Recession For Greater Stability?
One of the best ways to gain stability during a downturn is by investing in long-term rental, and specialty real estate. Real estate can offer particular value during a recession, because not only do prices tend to appreciate nominally with inflation if not decline much more slowly than more liquid assets, they offer steadier income than say, stock dividends, which can be cut to zero quickly.
Is Real Estate a Good Investment in a Recession?
The real estate market is typically less volatile than the stock market, on average, and can therefore offer a degree of shelter in an economic storm. Investors can shift portions of their portfolios into real estate from stocks or other more volatile assets, and reasonably expect a less-volatile experience over the shorter term. However, the reverse shift can be more cumbersome, when the economy exits recession and a greater proportion of portfolios are in illiquid assets.
What Are The Best Real Estate Investments For A Recession?
One potential solution to this dilemma is to invest in specialty real estate classes, that offer real estate investors a hybrid of lower volatility and greater return potential, even during a recession. Here, we will explore 5 real estate investments that could be a fit in such a scenario.
1. Commercial Multifamily Real Estate:
Commercial multifamily real estate, such as apartment buildings, can provide a steady source of income even during a recession. As tenants have to pay rent regardless of the economic environment, these assets tend to be less volatile than other investments. Additionally, rental rates can sometimes increase in a recession due to limited supply, giving real estate investors an extra kick.
2. Self-Storage Facilities:
Self-storage facilities are relatively low-maintenance real estate investments with a strong demand during recessions. These facilities benefit from people downsizing their homes, or generally needing more space for various reasons as the economy slows down. Furthermore, these facilities tend to have long leases and require minimal upkeep costs.
3. Mobile Home Parks:
Mobile home parks offer another opportunity to generate income in a recession. They typically require minimal maintenance and can offer higher returns than other types of real estate investments. Additionally, mobile home park tenants are often more resilient to economic downturns since they tend to pay rent in cash or via government-subsidized programs like Section 8.
4. Senior Housing and Living Facilities:
Senior living facilities are one of the most recession-proof real estate investments available due to their necessity regardless of economic conditions. Many seniors rely on these facilities for assistance in their daily lives and are therefore less likely to move away during downturns. Additionally, this type of investment often comes with built-in operational efficiencies, such as on-site staff, that can increase profitability.
5. Data Centers, Vertical Farms, Tower REITs:
Data centers, vertical farms, and tower REITs represent attractive investments in a recession as these industries are typically less affected by downturns. Data centers provide essential services to businesses, which often remain in demand regardless of the economy. Similarly, vertical farms and tower REITs require large capital investments and long-term leases, making them relatively low-maintenance and income-producing assets. Moreover, they tend to be inelastic in terms of their demand, meaning consumers tend to continue purchasing even through price hikes.
6. Utilities
Lastly, utility real estate is another solid option to weather a recession. These assets are often supported by long-term contracts and typically remain in high demand regardless of economic conditions (aka price inelastic). Furthermore, they often come with built-in operational efficiencies and limited maintenance costs that could increase returns even in a downturn.
Liquidity Risks Can Be Minimized
Financial markets have developed products intended to allow capital to flow more easily between otherwise illiquid assets. One such product is called a Real Estate Investment Trust, or REIT. These are fixed portfolios of physical properties that trade on securities exchanges and can be purchased or sold with a mouse click. In effect, this makes a large portion of real estate`s value as an asset class available for swift acquisition.
Treat Your Investments Holistically
Ultimately, it is important to remember that no single investment class can protect you completely during a recession. Instead, it is best to treat your investments holistically and diversify across multiple asset classes. While real estate may not be the most attractive asset in a downturn, there are still viable options available for investors looking to weather the storm while still generating returns.
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