Approximately half of Americans believe that a recession may be looming on the horizon, and this sentiment is shared by several experts as well, as noted in data from Costar.com. While recessions are an inevitable part of the business cycle, they can have detrimental effects on both consumers and investors. Real estate has historically performed well in an inflationary environment, although it has been outperformed by stock prices as an asset class over the long term.
When selecting assets for your investment portfolio, it is crucial to understand the current economic environment and your own risk tolerance. If you are an investor seeking stability during a recession, certain types of real estate investments may be better suited for this purpose. Long-term rental and specialty/mission critical real estate are among the best ways to gain stability during a downturn. These assets offer particular value during a recession, as it tends to appreciate nominally with inflation and offers more predictable income than other liquid assets.
The real estate market overall is typically less volatile than the stock market, making it a potential shelter during an economic storm. Investors can move portions of their portfolios into real estate from stocks or other more volatile assets, expecting a less-volatile experience over the shorter term. However, the reverse shift can be more cumbersome when the economy exits a recession, and a greater proportion of portfolios are in illiquid assets. In essence, trading out of real estate is not as easy as trading out of stocks - at times, we have seen transactions take months to years to complete depending on the issues.
One possible solution to this dilemma is investing in specialty real estate classes, which offer a hybrid of lower volatility and greater return potential even during a recession. Here are five real estate investments that we feel could be a fit in such a scenario.
Multifamily real estate, such as apartment buildings, can provide a steady source of income even during a recession. As tenants must pay rent regardless of the economic environment, these assets tend to be less volatile than other investments. Rental rates can sometimes increase in a recession due to limited supply, giving real estate investors an extra boost. Further, with the overall lack of housing in the US market, multi-family could be a good place for capital for both the near- and long-term.
Self-storage facilities are relatively low-maintenance real estate investments with 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, they tend to have long leases and require minimal upkeep costs and minimal annual improvement costs.
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. Mobile home park tenants are often more resilient to economic downturns, as they tend to pay rent in cash or via government-subsidized programs like Section 8. Some landlords look steer away from these assets, however, the safety of a government subsidized income vs. not is where one weights the returns.
Senior living facilities are one of the most recession-proof real estate investments available due to their necessity regardless of economic conditions. With the ever-increasing population of retirees these will be see an increased demand over the next few decades until the population data
shifts the other direction. 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.
Data centers, vertical farms, and tower REITs are 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. Furthermore, they tend to be inelastic in terms of their demand, meaning consumers tend to continue purchasing even through price hikes.
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.
If you would like to discuss your portfolio allocation in real estate or think you would like to take advantage of some of the ideas here, reach out to our team and let us discuss your needs. www.cornwell.co / 480-951-1212
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