What tenants will perform the best for commercial property owners?
Businesses and investors alike are unsure about what the future will hold. Some experts predict a recession, while others are more optimistic. Nevertheless, with the possibility of a recession on the horizon, commercial property buyers may want to consider a few "recession-proof" options as investment opportunities.
Small business-focused spaces
Some reports indicate retail is making a strong comeback after the pandemic. Online shopping, however, appears more of a driver for the comeback than brick-and-mortar stores.
There is still an increased consumer appetite to support small businesses. While many of them have a corresponding online shop, some focus primarily or even exclusively on their physical store. Although these stores still present some risk, small businesses can adapt to quick, necessary change should a new hurdle arise.
2021-2022 saw a boom of new small businesses. It was the fastest rate of growth in a decade and even faster than pre-pandemic levels. As a result, commercial landlords that cater to small businesses may continue to thrive in 2023.
Self-storage spaces
Self-storage properties are often overlooked as viable commercial real estate. In a recession, however, self-storage facilities can be lucrative. Some homeowners downsize during a financial downturn, but they opt to store their possessions in a storage unit rather than sell them.
Industrial and warehouse
With online shopping on the rise, retailers need warehouses to temporarily store goods. Larger businesses need multiple warehouse locations to house goods to facilitate speedy shipping.
Warehouses can make larger companies more efficient, which means demand for these locations is increasing. A Triple Net Lease can make these arrangements even more profitable.
What businesses are expected to fare poorly?
It depends, but a few trends appear to affect most of the country.
Office spaces
As more companies make the shift to remote work, there is a surplus of office space. Working from home appeals to employees and employers. As a result, as office leases come up for renewal, businesses will consider reducinging or even eliminating office space.
General retail space
If a recession hits, retail businesses are vulnerable to a downturn. While some small businesses may perform better than chain stores, retail in general will be vulnerable. Multi-tenant commercial spaces, like shopping or strip malls, are prone to recession struggles.
Multi-family homes
An apartment building or multi-family home is technically a residential property, but it can be a commercial endeavor for the property owner. These properties tend to perform well regardless of the economy. Unlike a single-family home, if one renter suffers hard times, income from other renters will provide stability.
While holding a multi-family property may be a fine investment during a recession, it takes considerable time and effort to fill apartment buildings..
What can commercial property owners do about vacant office spaces?
Creativity is key to transform an unproductive commercial property. While vacant office space owners can try to sell an underperforming property, it may be more profitable to pivot and serve other markets. This pivot may be a full-blown business model change or it could be less substantial.
Private events
Demand for event spaces is starting to pick up even though it is slightly lower than pre-pandemic levels. Specifically, individuals and companies are looking for clean spaces to host smaller gatherings, so a vacant office building (or a portion of it) instead of a huge convention center might be the perfect size for some events.
Photography and art studios
Many artists need large spaces to spread out and display their work. An empty office building might be a good option for artists to work or exhibit. Even short-term rentals for photography sessions or one-night events can be profitable in the right circumstances.
Pop-ups
Pop-ups are increasingly popular—they offer retailers a cost-effective way to showcase their products. They can be seasonal or coincide with temporary events. These short-term leases can also be attractive to local businesses and ecommerce companies.
What could impact commercial property owners in 2023?
Commercial property owners still face a lot of uncertainty as they head into 2023. Some of the top concerns include:
- Inflation.
- Workforce management.
- Cybersecurity.
- Supply-chain issues for remodels and construction.
Ultimately, commercial property owners may want to tread lightly right now by holding off on riskier investments.
If you have questions about commercial investment options, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
