Real Estate Strategies in a Recession
Owning or leasing commercial real estate is a numbers game. That much hasn’t changed over the last couple of weeks. But what has changed is the almost complete shutdown of the U.S. economy, and with it a great deal of uncertainty for businesses.
There’s an old quote from a James Bond movie that seems fitting for this situation.
“You’re a kite dancing in a Hurricane Mr. Bond,” the character tells our favorite spy.
While you may feel like the kite tied to one frail string facing the winds of change, we want to help you with some strategies for managing your real estate assets during this tumultuous time.
Leasing
If you’re currently leasing a space and your business is shut down, you need to be talking to your landlord right now. I mean put down your phone, iPad or get away from your computer screen this very moment and make the call. Your landlord cannot read your mind and needs to know how your business is doing so you can both start to make some plans.
Most landlords want you to stay solvent and they want you to succeed. Believe me, they don’t want to have to look for another tenant.
If it means getting together and talking about extending your lease for a few months to account for a brief deferral period, that’ better than getting evicted, both for your landlord and for your business. Perhaps you can make a deal to pay less rent for a while to account for the business stoppage.
Here’s the good news for existing businesses. If you have a lease coming up for renewal in the next few months, now is a great time to start asking for some rent concessions. Whether it’s a reduced rental rate for the first year or two, or perhaps a shorter term on the lease, feel free to negotiate and find some middle ground to make it a win-win for you and your landlord.
Landlords
If you’re a landlord and you have commercial tenants, try to understand where they’re coming from. The government has essentially shut down most businesses. Both the federal government and the state are trying to coming up with ways to help businesses stay afloat during this painful time. But as with anything government related, it will take some time and there will be missteps along the way. Be patient and communicate with your tenants.
If you have open commercial space, think about using a qualified commercial real estate agent to help fill your space, ie: someone who only practices commercial real estate. They will likely better understand the ins and outs of leases, demand and what vacant space is going for in the market and have the experience to help a deal get done with limited distractions and negotiations.
In a recessionary environment there will soon likely be an over supply of commercial space. Saavy landlords and investors will need to remember they will likely have to offer some concessions on the space like free rent for a few months in year two or perhaps a more generous tenant improvement package for paint, carpet and other aesthetics.
Landlords might also have to get competitive with lease terms. For example, to secure a tenant the landlord might need to say yes to a five year lease instead of the ten year lease they were used to getting while the economy was booming.
Landlords will also need to be prepared for more lease defaults in the next 12 to 18 months as the economy unwinds. Be sure to have your attorney on speed dial.
Sales
For some business owners or investors, now might be the right time to cash out and sell their existing commercial real estate assets. If you’re a business and need cash flow, you might be able to sell your building and downsize into something more affordable. The advice here is to be creative and be flexible.
With a recession in the cards, commercial building sales will continue, but there will be bargain hunting investors afoot. Know what your building is worth, what you have into it, and what the magic number is for getting it sold. Again, I would strongly advise you to hire a qualified commercial real estate agent who has experience developing valuations for property beyond simply looking at the county assessor’s valuation. There are a number of factors to consider including:
1. Type of property
2. Age of property
3. Historic cash flow of the property
4. Location of property
5. Comparable sales over the last several years
These are just a few of the considerations you’ll need to take into account in order to come up with a competitive sales price. And the sad fact is during down economic times, the price for commercial properties will likely decrease because of perceived demand. The good news is that interest rates will be the most advantageous we’ve seen in years and if you have the dry powder, which you should since you’ve been saving up during the boom times, securing good quality commercial property can boost your portfolio.
And remember, there are some asset classes that typically do very well during recessions, like multi-family housing and professional office buildings.
Right now we have a number of investor clients who are actively looking for good quality cash flow producing real estate so if your property fits that criteria, don’t be afraid to reach out.
With a recession in the cards for the next few months, now is the time to start thinking about your options when it comes to your commercial real estate whether you’re an owner, operator, landlord or lessee.
If we can be of assistance in helping you buy, lease or sell commercial real estate, contact us today.
Chris Herzog started Stokes Herzog Realty in February of 2019 and specializes in commercial real estate. Using the unique skills and resources of his wife’s sister company STOKES|HERZOG Marketing + Consulting, Chris can help market your properties using the latest digital services including video and advanced aerial drone imaging.