Markets tend to be cyclical. It’s likely that the U.S. economy will see another recession at some point in the coming years, and real estate will probably be impacted. A quick glance at the headlines hints at possible triggers, from trade conflicts and overvalued markets to terrorist acts and wars.
Investors who take steps now can help insulate themselves from major losses in the event of an economic slowdown or recession. You might even end up positioned to seize opportunities downturns can produce.
If a downturn seems imminent, organize your business to weather some leaner years. To reduce your exposure, consider the following tips.
1. Watch Your Leverage
Exercise caution when it comes to your leverage positions. Shouldering too much debt — and the accompanying servicing obligations — can make you particularly vulnerable during downturns.
You might not be able to refinance when you need to if your financial ratios have deteriorated. Renegotiate or refinance your loans now to extend the terms and possibly obtain lower interest rates.
2. Expedite Sales Timelines
If you’re thinking about selling properties in the near future, you might want to move up the timeline. Otherwise, expect to hold such assets for several years or accept prices that generate lower returns, because cap rates generally take at least two years to climb back to previous highs after a slowdown.
Selling also might be advisable if factors — such as the area, tenants or property itself — make you uncertain about a property’s long-term viability. A like-kind exchange is another alternative, allowing you to roll into another property with a consistent cash flow and fewer economy-related risks.
>> Read “Time for a 1031 Like-Kind Exchange Primer”
3. Review Leases
Which leases are due to expire over the next few years? Vacancy rates already are on the rise, and a recession would certainly send them higher at the same time rents stagnate or fall. The slower cash flows that result can make it hard to meet loan obligations.
Determine which tenants are likely to be reliable going forward, considering, for example, how their respective industries will fare in a recession. Do what you can now to extend leases for tenants that are likely to perform well, and replace tenants with revenues that might suffer in a downturn, undermining their ability to pay rent.
4. Stockpile Cash
When the economy is booming, it’s tempting to spend more — but you’ll be better off growing your coffers. Decrease or even skip owner distributions, and let the money accumulate in operating accounts to ensure you have enough to cover upcoming improvements, leasing commissions or revenue gaps.
5. Tackle Repairs, Rehabs and Upgrades Now
Don’t wait to install that new roof, refresh interior and exterior paint jobs, or repave parking lots. Take advantage of today’s readily available capital, at low interest rates, to put your assets in top-notch condition and improve their “curb appeal” for current and future tenants.
6. Invest in Technology
Automation is improving efficiencies and cutting costs in all kinds of industries, and real estate is no exception. Do your due diligence and invest in scalable technological solutions for more rote sales and management tasks, so you can deploy employees to more profitable activities.
Real estate, like the rest of the U.S. economy, tends to run in cycles. Proactive measures during an upswing can reduce the negative impact to your bottom line the next time the market slips.
Please contact a member of your service team, or contact Becky Simmons at bsimmons@cohencpa.com or Lisa Loychik at lloychik@cohencpa.com for further discussion.
