Best Practices: Preparing For A Recession
The Best Practices series asks CRE leaders around the country about how to best execute a single aspect of their business.
With the latest U.S. economic expansion now a little long in the tooth, talk turns to the prospect of a recession — sooner or later, mild or devastating.
It is all very well to talk about a recession in the abstract, but what steps can a commercial real estate company take to prepare for the impact of a recession, which can include less demand for space or downward pressure on CRE valuations?
We asked real estate pros around the U.S. what a company like theirs can do to prepare for a possible recession.
Capstone Advisors President Alex Zikakis
While we're not overly concerned about a severe impending economic downturn, we're absolutely taking steps to recession-proof our organization and our holdings. Most of the time, the cause of a real estate investor’s greatest pain in an economic downturn is debt maturity during a time of illiquidity or poor debt coverage. We generally start lease renewal discussions with our tenants a year before their lease expires and manage our lease expiration dates carefully.
Almost all of our commercial assets are held long term, and we have refinanced and extended debt where we have upcoming maturities. By and large, we stay away from securitized debt, or any loans with expensive or limited prepayment options. We primarily finance with lenders that portfolio their loans and we have strong long-term relationships with lenders that know us and our business. We keep our leverage levels modest on our commercial centers and keep our land holdings completely unleveraged.
We have also developed an approach to property management that challenges the traditional landlord-tenant relationship, to help prepare for the realities of the changing economy. We monitor our retail tenants’ sales performance and invest in resources and guidance to help them grow their business. When we do have a struggling tenant, we also consider an early termination agreement so we can replace them with a stronger tenant. We believe it's in the best interests of all stakeholders to replace struggling tenants when there's strong demand for better retail concepts.
Capstone Advisors is a diversified real estate investment and development company based in Carlsbad, California.
Bellwether Enterprise Chief Administrative Officer Denise McGee
Our client and employee experiences are critical to us at Bellwether, regardless of the economic conditions.
Most companies eliminate staff during or immediately before a recession — we try to take the opposite approach. We intend to keep strong talent regardless of the economy. Our first choice is to continue to develop employees by moving them from one department to another based on the shift in the workload. This reinforces our commitment to their development and serves to broaden their knowledge around other aspects of the business.
We may cut back on traditional items, such as travel, company events and extra administrative expenses. But one area that will remain active is marketing. It will be crucial to expand upon quarterly newsletters, email blasts and social media campaigns to assist clients through the recession and look for additional opportunities to grow the company.
Bellwether Enterprise, headquartered in Cleveland, is one of the largest commercial and multifamily mortgage banking companies in the country.
BH3 principal Daniel Lebensohn
Generally speaking, in a bullish market, it's easy for everyone to shine. But even seasoned veterans, BH3 included, have to remind themselves that anyone can get caught in a shifting market.
In a recession, or a tightening market, the margin for error is far less. How do you prepare for a recession? Understand that you're unlikely to time the market, so instead always take time to zoom out from what you're doing within your organization to examine the basics of the broader market. If, for instance, you see that a cycle has been running for a decade, that's a good time to evaluate what hedges you have in place to offset those strategies being deployed in the bull end of the cycle.
If you're in long developments, perhaps it makes sense to evaluate what a paring back of additional developments looks like to the company, and further establish what alternative business lines will thrive on the other side of the market. Even if you don’t reach hard conclusions, by virtue of thinking about it, you'll naturally prepare through the self-evaluation process.
The quickest way to lose everything is ego-based decision-making. In the real estate business, be prepared to take advantage of opportunities that will present themselves, not only to acquire great assets when they're underperforming due to circumstance beyond themselves, but even more significantly, to be able to hire top human capital from other firms that are suffering as a result of improper planning.
BH3 is a real estate development firm active in New York City and South Florida.
Camden Property Trust Senior Vice President of Strategic Services Kristy Simonette
Pay down your debt and position yourself to beat your competition by offering the best products and service possible. Be careful not to get swept up in the negative talk about the economy, and don’t use the sagging economy as an excuse for not making your numbers.
Look at the downturn in the economy as a disruption, a time to be adaptable and innovate. Don’t be afraid to take risks, because without risks there is no reward.
Camden Property Trust is a Houston-based REIT that specializes in apartments.
Stream Realty Senior Vice President Sara Terry
As a landlord, this isn't the time to take risks with low- or no-credit tenants. My clients are being extra diligent in verifying tenant financials at this time, and asking for larger security deposits or letters of credits when necessary. Another option is to offer spec suites for smaller tenants which could be easily re-leased to another tenant if the original tenant defaults.
Stream Realty is a Dallas-based real estate services company.