Prepping Real Estate Firms for an Economic Downturn
Economists, CEOs and business owners each have their own opinion on if or when the U.S. economy will fall into a recession. Some experts indicate that there is a good chance an economic downturn or recession will happen within the next two years, making it logical for real estate professionals to begin bolstering protections. Regardless of the timing of the recession in the future, adequately addressing a down market is essential to business survival. What steps can real estate firms take now that will help them get through a recession and come out the other end even stronger? Loan Considerations Evaluate your portfolio to determine which properties will be most vulnerable during a recession. If passing your loan covenants are an issue today, would the company still pass if there was a decrease in occupancy or if you were forced to freeze or decrease rents to retain tenants? Decreased occupancy or rents would also result in a lower net operating income and a decreased valuation. This could be an issue if the loan on your property is maturing within the next several years and the company will need to refinance. What you can do now is run various scenarios and evaluate if it makes financial sense to refinance today, as rates continue to be low, or wait for the maturity date of the loan. Most commercial loans have a prepayment penalty outlined in the agreement that would have to be taken into consideration.