WPC in the News | Jul 31, 2023

Three Ways Real Estate Investors Can Recession-Proof Their Portfolios

Portfolio diversification, a focus on mission-critical real estate and tenant credit analysis are key

By: W. P. Carey Editorial Team
Original article posted in the WMRE Midyear Outlook on July 31, 2023

Economic experts are continuing to signal that a recession could be on the horizon. A number of factors are contributing to this sentiment, but recent bank failures, tightening credit, interest rate increases and sustained high inflation are among the biggest. To help prepare in case of a downturn, below are three things real estate investors can do to “recession-proof” their portfolios and position their business for long-term success. 

Two people wearing dress shirts shaking hands near a table with an open laptop. Multiple papers and $100 bills are on the table.
Prioritize diversification

When it comes to portfolio resiliency, diversification is key. Investing in a range of geographies, asset types and industries reduces potential risks tied to individual market volatility. If one particular asset class is more heavily impacted by a recession than others, having a diverse portfolio comprising several asset classes reduces the overall impact. Portfolio diversification also allows investors to allocate capital to where they are seeing the best risk-adjusted returns. This means investors can be nimble and take advantage of unique opportunities should they arise. 

Focus on mission-critical real estate

To be successful in commercial real estate investing, it’s important to focus on properties with strong fundamentals, such as location, size and quality. However, when positioning a portfolio to weather all economic cycles, arguably the most important aspect of a property to focus on is “mission criticality,” or how important the property is to the tenant’s operations. When a property is mission critical, a tenant is more likely to remain in the facility – both in good times and in bad – for the long term. The worst thing that could happen during an economic downturn is to have a portfolio of vacant assets – and therefore limited rent payments – so by focusing on mission criticality, investors can better ensure durable, long-term cash flows. 

Analyze tenant credit and business

Disciplined credit underwriting is critical to long-term portfolio success. Large tenants with a strong underlying credit and revenue history will be better equipped to weather downturns through access to liquidity, or in a worse-case scenario, have the ability to restructure and continue operating in their mission-critical properties. In addition to a tenant’s financials, it’s also important to examine the long-term outlook of the tenant’s business and industry. For instance, a tenant that produces electric car engines may have a better long-term outlook – and therefore be better suited to a long-term lease – than one that produces gas-powered engines given the trend toward electric vehicles. 

Final thoughts

It’s never too late for real estate investors to look at their investment strategies and take steps to enhance their portfolio resiliency. Focusing on long-term stability – through diversification, mission-critical real estate and creditworthy tenants – versus short-term gains will help investors to build portfolios that will carry them through all market cycles.

You May Also Like:

Image of calculator with 2025 typed on screen

What’s Next for Commercial Real Estate?

After several challenging years contending with the impacts of a global pandemic, the commercial real estate market finally seems to be healing. As noted in the latest Emerging Trends in Real...
Photo of warehouse facility

Corporate Capital Outlook - Q3 2024

Written by Colliers Corporate Capital Solutions, the report details the current state of the global economy and how that’s impacting the net lease sector. The report also features contributed content...
Photo of blocks with percentage signs getting smaller

What the Latest Rate Cuts Mean for the Net Lease Sector

The persistent high cost of capital, along with the fact that large amounts of corporate debt are set to mature, have been ongoing challenges for investors. The Fed’s recent rate cut – the first...