How a Recession Will Affect Commercial Real Estate (2024)

Recessions are periods of economic downturn marked by a steep decline in the gross domestic product (GDP) and typically high unemployment rates. While recessions can hurt various sectors of the economy, one area that is often affected is commercial real estate.

During a recession, businesses may experience financial challenges, which can decrease demand for commercial real estate. As a result, property values may decline, and it may be more difficult for landlords to find tenants or for businesses to afford to rent space. Additionally, the credit market may tighten, making it harder for companies to secure loans to finance their real estate purchases or renovations.

A recession's impact on commercial real estate can vary depending on the specific type of property. For example, office buildings and retail space can be more vulnerable to economic downturns because this type of real estate relies on businesses to occupy the space. On the other hand, industrial and warehouse properties may be less affected because they are often leased to essential companies that are less impacted by economic downturns.

One way a recession can affect commercial real estate is by leading to a decrease in construction activity. During an economic downturn, businesses may be less likely to invest in new construction or renovations, which can lead to a decline in construction jobs and overall economic activity. In addition, banks and other financial institutions may be less likely to lend money for new construction projects, further slowing development.

Another way a recession can impact commercial real estate is by selling and purchasing properties. During a recession, there may be a decrease in demand for commercial real estate, which can lead to lower property values. This can make it harder for businesses to sell their properties, or it may result in them having to sell at a lower price than they would during a more robust economy. On the other hand, businesses looking to buy commercial real estate may find good deals during a recession because of the lower prices.

While a recession can negatively affect the commercial real estate market, it is essential to note that it will eventually recover. Commercial real estate can provide a haven during a recession because it is a tangible asset that can hold its value over time. Additionally, the low prices available during a recession create opportunities for businesses to invest in commercial real estate that provides long-term benefits.

A recession can significantly impact commercial real estate, but it is essential to remember that the market will eventually recover. Therefore, businesses that can weather the downturn and take advantage of opportunities that may be available during a recession may be well-positioned for success in the long term.

During a recession, the commercial real estate (CRE) market may present some opportunities for businesses looking to invest. Here are a few potential opportunities that may be available:

1. Lower prices: A recession can lead to decreased demand for commercial real estate, resulting in lower property values. This can create opportunities for businesses to buy properties at discounted prices.

2. Distressed properties: Some businesses may be forced to sell their properties due to financial difficulties during a recession. This can create opportunities for investors to acquire distressed properties at a lower price and potentially turn them around for a profit.

3. Lease negotiations: A recession can lead to a decrease in commercial real estate demand, making it harder for landlords to find tenants. As a result, businesses looking to lease space can negotiate more favorable lease terms, such as lower rent or extended lease periods.

4. Long-term investments: While a recession can harm the short-term performance of commercial real estate, it is crucial to remember that the market will eventually recover. Commercial real estate investing during a downturn may provide long-term benefits once the economy recovers.

We'll note that investing in commercial real estate during a recession carries risks, and businesses should consider their options before making any investments. But, again, seeking the advice of a financial professional may help make informed decisions.

Lower Prices

Lower prices for commercial real estate may be one opportunity that is available during a recession. A recession can lead to decreased demand for commercial real estate, resulting in lower property values. This can create opportunities for businesses to buy properties at discounted prices. However, it's necessary to consider the potential risks and benefits of investing in commercial real estate during a recession before making any decisions.

Distressed Properties

Distressed properties are in financial distress, often due to the owner's inability to meet their financial obligations. During a recession, some businesses may be forced to sell their properties due to financial difficulties. This can create opportunities for investors to acquire distressed properties at a lower price and potentially turn them around for a profit.

There are a few ways to find distressed properties, such as:

1. Foreclosure auctions: Banks and other lenders may auction off properties that have been foreclosed upon due to the owner's inability to make mortgage payments.
2. Short sales: In a short sale, the property owner sells it for less than the amount they owe on it, with the lender's permission.
3. Bank-owned properties: Banks may own properties acquired through foreclosure and be willing to sell them at a discounted price.

It is critical to carefully evaluate the condition of the property and the potential costs of repairs or renovations before making an offer on a distressed property. Again, seeking the advice of a real estate professional may help make informed decisions.

Lease Negotiations

During a recession, businesses looking to lease commercial real estate may be able to negotiate more favorable lease terms. A recession can lead to decreased commercial real estate demand, making it harder for landlords to find tenants. As a result, businesses in a position to lease space can negotiate a lower rent or extended lease period.

Here are a few tips for negotiating a lease during a recession:

1. Research market conditions: It is vital to understand the current market conditions and how much other properties in the area are leasing. This information can help you determine a fair price for the space that interests you.
2. Negotiate the length of the lease: Longer lease periods may be more attractive to landlords during a recession because they provide stability and a guaranteed source of income. As a result, businesses can negotiate a longer lease in exchange for a lower rent payment.
3. Consider other terms: In addition to rent, other terms can be negotiated in a lease, such as the length of the tenant improvement period and the percentage of common area maintenance fees for which the tenant is responsible.
4. Seek a real estate professional's advice: Working with a real estate agent or lawyer with experience in commercial leasing can help ensure that you get the best deal possible.

It is crucial to carefully consider your needs and negotiate a fair and favorable lease for your business.

Long-term Investments

Investing in CRE amidst a recession may provide long-term benefits once the economy recovers. While a downturn can hurt the short-term performance of commercial real estate, it is essential to remember that the market will eventually recover. As a result, investing in CRE during a recession may provide an opportunity to buy properties at a discounted price and potentially see a return on the investment once the market improves.

Before making any decisions, consider the risks and benefits of investing in CRE during a recession. Some factors to consider are the specific property, the location, and the overall economic conditions. Again, seeking the advice of a financial professional may help make informed decisions.