A Recession Is Coming: What Commercial Real Estate Owners Should Do Now
Commercial real estate owners, and their brokers, are optimists. That’s both a blessing and a curse.
Real estate is cyclical. It’s impossible to predict exactly when the U.S. economy will tip into the next recession, but most experts agree we’re in the ninth inning of this current cycle. Translation: the end is near.
The scary part is that a recession is typically triggered by an adverse event causing panic that sends the market spiraling out of control. Mob mentality takes over. What is that trigger? A sudden collapse of an overpriced stock market perhaps, the state of the Chinese economy, Russian aggression, a terrorist attack that feels like the start of a new war — the list of potential shocks to the market is long.
The point is to temper your optimism and prepare for the worst. Prepare now while you have the time, cash and flexibility to make moves. Here are some tips to get you started:
Start building your emergency fund by forgoing owner distributions. It’s still your money; just keep it in the operating account for easy access.
This is arguably the biggest mistake investors make. Do you have sufficient reserves set aside for tenant improvements, leasing commissions or periods of negative cash flow? If not, start building them now.
Review Loan Terms
Is your loan coming due within the next couple of years? During the Great Recession, many investors lost their properties, not because they were delinquent on their mortgage payments, but because they were unable to refinance their existing loan.
Trust me, your bank will look more favorably at your financial ratios now. Banks are often the leaders of mob mentality. As soon as we tip into recession territory, their story will change. Don’t wait. Extend your loan term now. Try to get five years of room to breathe. And if you haven’t refinanced in the last few years, it might save you some money because your interest rate may go down.
Complete Big Repairs And Upgrades Now
Have you been putting off that new roof? Façade replacement? Repainting? Parking lot improvements? What projects do you plan to complete in the next three years? Tackle them now while you’ve got the cash. Better safe than sorry.
Find Your Break-Even Point
Based on your current rent roll and operating expenses, what vacancy rate will result in the property’s monthly cash flow equaling the mortgage payment? Know your number and protect your break-even point.
Sell At Peak
This is your chance to maximize the sale price of your property. The No. 1 reason sellers put off selling when times are good is that they don’t want to pay the capital gains taxes.
Of course, during the Great Recession, sellers would have been telling a very different story. Many sellers would have been delighted to get a mulligan. They’d sell at peak value and pay the taxes. Or, more likely, they’d sell and 1031 Exchange into a different property with fewer management responsibilities, consistent cash flow and less exposure to the downturn.
Unfortunately, there are no mulligans in the real estate game. If you know your property has reached peak value and you’re happy to own it another 10 years, then ride it out. But if you aren’t confident in the area, the property, the tenants or your desire to hold the property another 10 years, then you should call your trusted commercial real estate broker and start the process. You don’t have time to waste.
Keep in mind that we predict the next recession will not be felt evenly across all locations or property types. The properties that will be punished most will be those already out of favor, as well as those properties located in areas of low population growth. High growth markets and popular property types will still feel it, but not to the magnitude these other properties will. How well-positioned for the future is your property?
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About Beau Beach, CCIM
Beau is an elite Investment Real Estate Broker, Forbes contributor, author, investor and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Prowess IRES which specializes in selling investment real estate for the absolute highest price the market will pay…in the Milwaukee, Nashville, Chicago and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached by phone, scheduled call or Beau@ProwessIRES.com