What’s in Store for Commercial Real Estate
term customers who are not as price sensitive; it is not convenient to move or acceptable to sell/ throw away the storage contents. A $25 per month increase in the rental rate could represent a 15%-20% or larger increase yet still come in well under what tenants are paying for their cable services or cellphones. There’s high potential for lucrative exit strategies. Self-storage is a very fragmented industry—well over half the facilities are owned by individuals with only one or a few facilities. Yet, as we’ve seen during the past 15 years, they are frequently courted by hedge funds and institutional buyers flush with cash looking to pay high prices for assets that cash flow. This provides an opportunity for the individual investor to buy a facility at great prices in a recession, benefit from the advantages previously discussed, and exit with a great return. MOBILE HOME PARKS Recessions drive families and businesses to eliminate luxuries and focus on the bare necessities of life (e.g., food, shelter, and clothing, plus payroll in the case of businesses). Those entering a recession with a stronger capital position can hold on longer in their single-family home or large office building (more on this later), but if the recession is long and deep enough, it will cause nearly all individuals to dramatically cut expenses. Mobile home parks have been a consistent performer for decades. They typically don’t respond to the dramatic ups and downs of the economy, making them a stabilizing force in your portfolio during recessions. For housing,
Here are tips for recession-proofing your portfolio and adapting to the post-pandemic workforce.
by Gary Pinkerton
R eal estate investors have experienced meteoric returns in their favorite asset class since real property began its recovery from the devastating global shutdowns mandated in 2020. Whether you’re a buy-and-hold investor, a fix-and-flip professional, or even a private lender, there have been enormous and widespread real estate opportunities in 2021-2022. The questions on investors’ minds today are: 1. What impact will sustained high inflation have on returns? 2. What types of real estate questions from the perspective of commercial real estate, but many of the observations and lessons from history relate just as well to residential real estate and decisions you might need to make about your primary residence as a sustainable financial asset. CONSISTENT PERFORMERS Certain commercial asset classes, notably self-storage facilities and mobile home parks, have consistently are poised to do the best in a recession? We’ll take a look at those
performed well in recessions and are positioned to do so again even in the face of high inflation. For this cycle, certain multifamily assets should be added to the list, a result of underbuilding in the decade following the Great Recession (2008-2018) and again in 2020-2021. SELF-STORAGE Self-storage is a consistent high performer in periods of downsizing, dislocation, and budget cuts. It was the only publicly traded real estate asset type that had a positive return in 2008. There were several reasons that make it likely to repeat in recessions for decades to come: Costs can be driven very low. Management, on-site staffing, and security can all largely be automated. Marketing can be inexpensively performed locally because all the customers and your competition are local. Profit centers can be easily expanded. If the local moving company goes out of business, self-storage companies can expand their retail section for moving supplies and add rental vehicles. Tenants are incredibly sticky. Self- storage tenants tend to be long-
10 :: INVESTOR REVIEW :: NOV-DEC 2022
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