Real Estate Investments for a Slowing Economy

Matt Hudgins of National Real Estate Investor has written an excellent short article on the effect a recession in 2008 would have on real estate. He cites a Property & Portfolio Research report that indicates apartment properties, while more volatile in their net operating income during a recession, are better positioned to hold their value. In an odd dichotomy of the effect between net operating income and market-accepted capitalization rates, investors seem support capitization rates better on apartment properties versus other commercial classes of real estate during an economic downturn. Retail, the report says, are the most negatively impacted in a recession as consumer spending dries, lease rates fall and vacancy increases. Rather than restate the whole article, here is Matt's report.

In a November Marketwatch report, John Spence says analysts at UBS disagree somewhat stating that regional malls proved to be the best option during a downturn. He says they held values better and showed their defensive qualities during the last consumer-led recession in the early 1990s. The resilience of consumer spending and patience from larger, national mall tenants makes them more stable. He noted that it takes almost two years of slowing sales before malls start to face falling rents and increased vacancies.

Peter Korpacz, MAI supports this view. He says that regional malls are protected by leases that span recessionary times and by credit tenants whose long-term strategies involve continued mall presence. These top-tier malls will either continue to maintain their values or at worst will suffer minimal, short-term value declines. He also likes grocery-anchored retail centers during tougher economic times. He reasons that consumers typically cut back on durable goods, such as furniture and electronics and reduce their expenditures on soft goods, such as apparel resulting in negative growth in those retail property categories. However, their overall tendency is to continue core buying habits even in a recession. People tend to increase spending on food and drink and other local services typically found in grocery-anchored food centers which support occupancy, lease rates and, ultimately, value.

So who should an investor listen to among the market experts? Obviously, many other factors than the national economy factor into specific property values. Property specific lease and vacancy rates and terms, local economic and political conditions, competition and, of course, property location all are important. Opinions are going to vary as to risk factors that factor in. But property type should be an important consideration in light of economic forecasts that highlight the very real possibility of recession.