WPC in the News |

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:

Photo of Las Vegas convention center

Countdown to ICSC Las Vegas

ICSC Las Vegas, one of the largest tradeshows for the retail industry, is on the horizon with an expected 30,000 attendees eager to network and reconnect face-to-face with industry leaders and peers....
Photo of shopping cart in aisle in grocery store
Rising interest rates, increased cap rates, and sluggish deal activity created changes in the retail market over the past couple of years. Indeed, the bid-ask spread left many retail net lease deals...
Coin stacks and line chart rising upwards

How Sale-Leasebacks Help PE Raise Capital in a Tight Market

Funding for growth, refinancing corporate debt, and merger and acquisition activities are top priorities for many private equity firms. A recent PwC report noted that 60% of CEOs plan to...