Recession-Resistant Real Estate Investment Strategies for 2023

As speculation increases about whether (and when) the U.S. will enter a recession, some commercial real estate investors might wonder if they can recession-proof their investing. Unfortunately, there is no such thing as recession-proof real estate investing. However, over time, some real estate sectors have proven to be especially recession-resistant.

Recession-Proof vs. Recession-Resistant

Recession-proof implies that a real estate investment is completely shielded from economic turmoil. No one can ever realistically make such a promise. However, it’s safe to say that some asset classes are recession-resistant. This means an asset class can potentially remain stable in an inflationary environment.

“No class of real estate is immune to recessions. … No investor should think any investment they make is recession-proof,” Richard Green, director of the USC Lusk Center for Real Estate in Los Angeles, told the Mansion Global real estate news website.

Which Asset Classes Are Recession-Resistant?

A number of asset classes in commercial real estate have long demonstrated their resistance to recession. Here are five of them.

1. Multifamily and Residential

Multifamily properties and single-family rentals (SFRs) have stood the test of time.

For one thing, people need a roof over their head. And with the recent hikes in home prices and interest rates, millions of Americans in search of housing are turning to multifamily properties and SFRs; at this point, they’d rather rent than own.

Secondly, a rental property normally produces income during a recession even if the value of the property fluctuates. It’s worth noting that as demand for rentals stays strong, rents also are going up. The Federal Reserve Bank of Dallas predicts the year-over-year jump in rents will go from 5.8% in June 2022 to 8.4% in May 2023.

“We maintain that the multifamily/residential asset class is the best vehicle for midterm to long-term investment, assuming the basis is appropriate with the correct capital stack,” says Bryan Graf, senior vice president of Broadmark Realty Capital’s western region.

2. Self-Storage

Self-storage is another asset class that has managed to successfully weather recessions.

Pinnacle Storage Properties, a self-storage owner and operator, notes that four constant drivers of demand — death, divorce, downsizing and dislocation — contribute to the recession resistance of self-storage. Self-storage revenue took less of a hit during the Great Recession and the pandemic than many other asset classes did.

Although self-storage rental rates for new customers have fallen from recent record highs, revenue growth “remains strong as operators focus on boosting renewal rates,” according to Yardi Matrix, a supplier of real estate data.

As the U.S. teeters toward a recession, self-storage acquisition might make more sense than self-storage development.

“Ground-up development remains difficult to underwrite given the period of time between breaking ground and delivering the asset. There are still a lot of unknowns on interest rates and rental income, not to mention that construction costs are still relatively high,” says Graf.

3. Grocery-Anchored Retail

Just as people need housing, they also need food, even if inflation has driven up consumers’ grocery bills. As such, grocery-anchored retail centers tend to outperform other retail assets during recessions.

“Post-COVID, grocery-anchored retail has quickly become one of public and private investors’ most desired asset classes due to its high cash-on-cash yields compared to other investment types,” Dallas’ D magazine reported in September 2022.

Further supporting the embrace of grocery-anchored retail by REITs and other investors is that the grocery industry has felt less of an impact from online shopping than other retail sectors have, according to Commercial Property Executive magazine. Why? Because shoppers prefer to see and handle perishable foods before purchasing them.

Until the situation surrounding interest rates and construction costs shakes out, someone seeking to invest in grocery-anchored retail may be better off buying an existing property than building one from the ground up.

“Those who do capitalize projects in this environment will be viewed as contrarians, and should have the benefit of less competition and supply upon the delivery of their finished project,” says Graf. “However, it will take an optimistic view and forecast of what is to come in the future versus where we stand today, or much lower construction costs.”

4. Industrial

While grocery-anchored retail has seen relatively little effect from online shopping, e-commerce continues to boost the fortunes of the industrial real estate sector. The pandemic only accentuated the growing need for warehouses and distribution centers to support e-commerce operations.

While other segments of commercial real estate “batten down the hatches to prepare for an economic downturn,” SupplyChain247.com says, “the U.S. commercial real estate market continues to experience an industrial real estate boom.”

“Until developers can generate enough supply to catch up, industrial demand should remain largely unaffected by economic troubles. We’re unlikely to see the supply of warehouses … catch up to demand before late 2023,” SupplyChain247.com adds.

Yardi Matrix says the projected addition of 1.8 billion square feet of industrial space from 2021 through 2026 may not be enough to meet demand. If that’s the case, real estate investors should see plenty of opportunity in the industrial sector, regardless of the prospect of a recession. 

5. Medical Office

Medical office is poised to experience a healthier run during a recession than many other asset classes.

The medical office sector will be more insulated than traditional office buildings from broader marketplace trends because of its “recession-resistant nature,” Travis Ives, co-leader of Cushman & Wakefield’s U.S. healthcare capital markets team, told WealthManagement.com.

Nonetheless, deal volume in the medical office sector has dipped recently, in large part because of soaring interest rates and stricter underwriting requirements.

WealthManagement.com explains that the medical office segment has historically enjoyed higher tenant retention and rent collection rates than some other sectors. However, the medical office sector can’t recovery inflation costs the way multifamily can, due to the fact that multifamily tenants get annual lease renewals and medical office tenants typically don’t.

That being said, a recession generally won’t stop Americans from seeking critical healthcare services delivered by tenants of medical office buildings.

Regardless of market conditions and economic cycles, Broadmark offers flexible investment solutions and can move quickly to help you capture value and accelerate your real estate opportunities. Learn more about our loan products, or contact the Broadmark team to find the right investment strategy for you.