It’s not a matter of “if,” it’s a matter of “when” the next real estate downturn will occur.
There have been five recessions since 1980 with the longest one being the Dec 2007 – June 2009 recession, known as the “Great Recession,” which lasted for a little over 6 years. Many economists consider the Great Recession to be the worst financial crisis since the Great Depression of the 1930s. It has now been over 10 years since the last cycle, and many real estate professionals have never experienced a downturn.
For those of us who were in the real estate or banking fields during the 2007 downturn, it was a traumatic time. Banks failed, layoffs abounded, loans defaulted, development slowed, lease rates declined, real estate values plummeted, and cap rates decompressed. Traditional real estate Asset Management quickly morphed into Workout and Special Assets Management.
The Great Recession taught me several valuable and lasting lessons. By late 2006 I began to see early signs that real estate performance had begun to decline, but the alarm bells did not go off until late 2007. Lesson learned, always be vigilant for advanced signs of a downturn. Set up your monitoring systems to constantly track and alert you to changes in Key Performance Indicators: occupancy, tenant retention, market rent PSF, to name a few. But further, keep an eye on cap rate changes, sales activity, local economic growth patterns, overbuilding, and national level Black Swan events. Knowing clearly in advance that a recession is on the horizon allows you to pivot management strategies and make critical strategic portfolio decisions.
The most important lesson learned is always manage real estate with a workout mentality. Time counts! Lock in quality tenants, hold expenses in check, properly maintain properties, fix image issues, plan for disruptions in lease/rent pricing, carefully monitor debt covenants, use think-outside-the-box-value to create value and exit weak performers. Focus your marketing efforts on competitive advantages and push hard during the good times to achieve sustainable NOI. Look for vulnerabilities in your monitoring systems and procedures that could result in missing indicators of negative trends. Critically, prepare mentally for a downturn – makes sure your business plans address a “Great Recession” scenario.
At PEG Companies we focus on urban-infill and suburban-core multifamily and hospitality development and ownership. Our investment and fund structures allow for long-term tax enhanced strategies that emphasize cash flow and value creation. We purposely devote a high level of resources to our Asset & Property Management Teams to allow for a high level of portfolio monitoring and for quick processing market of data. We take the long view on creating sustainable value but the short view on pushing for results – our mantra is to avoid becoming complacent!