At some point in your life, you have probably heard someone claim real estate investments to be “recession-proof”. Although this is a common saying there is a lot of discourse surrounding the validity of this statement, with many who stand by it as well as many that oppose the claim. In the times of Covid-19 with the United States being faced with the first economic recession since 2007, it is important for investors to have conversations about topics such as these so they can protect their assets when markets undergo major changes.
The problem with claiming real estate investment is “recession-proof” is that it is too broad of an area to predict a singular positive or negative outcome for all of its submarkets. The 2008 recession is a good example of this. While multifamily complexes took a 7.5% decrease in rental income during the recession, they recovered well with an increase of 25.7% through the end of 2018. On the other end of the spectrum retail was faced with a 14.1% loss in rental income, nearly double that of multifamily assets, and still has not been able to bounce back.1
Cr: CBRE USA.1
Even within focusing on submarkets, there is no “right” answer to what type of investments will be the least risky in the face of a major economic downturn. Take senior housing for one. In the wake of the 2008 recession, it recovered relatively quickly2 but is now facing one of the largest declines in average property value alongside skilled nursing homes. This is due to a mixture of the prolific spread of Covid-19 in senior housing facilities as well as their target population often being high risk for the Corona Virus, making residential facilities with greater tenant interaction less desirable.3
Cr: Orange County Register.4
So no, real estate may not be completely “recession-proof”. While there may be submarkets that are more resistant, one cannot predict the circumstances surrounding future economic downturns. For that reason its important for any investor to diversify their assets. While certain investments may be considered safe bets right now due to their location, industry, and target market, one can never predict what drastic changes may come in the future. Diversifying one’s investments helps reduce potential risk in the future and is a better bet for more stability as well as long-term growth.
- “Multifamily Most Resilient Property Sector to Recessions.” CBRE US, www.cbre.us/research-and-reports/US-Multifamily-Research-Brief-February-2019.
- “Is Seniors Housing Prepared for a Recession?” Seniors Housing Business, 4 June 2019, seniorshousingbusiness.com/is-seniors-housing-prepared-for-a-recession/.
- Mullaney, Tim. “The Covid-19 ‘Great Reset’ Scrambles Senior Housing Status Quo.” Senior Housing News, Senior Housing News, 27 May 2020, seniorhousingnews.com/2020/05/26/the-covid-19-great-reset-scrambles-senior-housing-status-quo/.
- Lansner, Jonathan. “Bubble Watch: Coronavirus Slashes Commercial Property Values 24%.” Orange County Register, Orange County Register, 17 Mar. 2020, www.ocregister.com/2020/03/17/bubble-watch-coronavirus-slashes-commercial-property-values-24/.