If we were able to predict the future of the economy, investing in commercial properties would be a relatively simple matter. We would know exactly which cities and neighborhoods were going to explode in popularity. We would have full confidence in the appreciation in value of those properties. And we would never worry about whether those properties would become unoccupied in the future.
Alas, economic certainty is an impossible dream. There’s always at least some degree of economic uncertainty, with some eras being more uncertain and problematic than others.
How exactly are you supposed to deal with economic uncertainty when managing your commercial property investment and management strategies?
The Many Challenges of Economic Uncertainty
Economic uncertainty and turmoil can disrupt even the best financial plans. In some ways, economic uncertainty is even worse than bad economic conditions; it’s possible to make money during recessions and other periods of economic turmoil, and that possibility turns to probability if you could somehow predict how those tumultuous times play out.
There are several issues embroiled in economic uncertainty, including:
- Tenant turnover. How much tenant turnover should you expect? Losing a tenant can be devastating in a commercial property, especially if there aren’t many tenants eager to rent commercial properties in the area. Even a few months of vacancy can seriously disrupt your investing plans.
- Demand and rent prices. How are you supposed to price rent for a property when economic uncertainty is so high? Do you sacrifice profitability to appeal to risk averse businesses? Do you set rent prices higher in the hopes that economic conditions change for the better in the near future?
- Future appreciation. How do you anticipate price appreciation? Commercial properties are especially vulnerable to economic volatility, as they’re highly dependent on businesses doing well.
- Logistical and management hurdles. Economic uncertainty can also present logistical and management hurdles. Labor shortages, business failures, and other issues can get in the way of your ability to manage your commercial properties appropriately.
How to Manage Economic Uncertainty
So what can you do to manage economic uncertainty in the context of your commercial property investment strategy?
- Calculate what you know. Economic variables can be known or unknown. While there’s not much you can do about total unknowns, there are likely some economic variables and indicators that you can know and calculate. Chart out everything you can to get a better understanding of current economic conditions and make reasonable predictions about the future, even if you can’t rely on those predictions.
- Prioritize tenant retention. If you currently have commercial properties that are occupied, prioritize tenant retention above all. It’s much easier to keep a current commercial tenant than to find a new one, especially during times of economic uncertainty. Sometimes, this means making sacrifices, such as reducing rent, but it might be the most profitable move in the long term.
- Consider making cuts. If you want to preserve your profitability during a volatile era, consider making cuts to your strategy. Cut any unnecessary expenses and avoid making any major renovations or risky investments during this time.
- Diversify your holdings (real estate). Portfolio diversification is one of the most important strategies in all of investing, and it’s even more important during times of economic uncertainty. Holding many different types of assets means you’ll get exposure to many potential upsides and risks, so that no matter which way the economy goes, you’ll have opportunities to succeed. One crucial strategy for commercial property investors is to diversify your real estate holdings, specifically. Holding commercial properties in different cities, holding different types of commercial properties, and even getting exposure to the residential real estate market can help you balance out your assets.
- Diversify your holdings (broadly). You can also use this time to diversify your holdings more broadly. Even if the commercial property market isn’t doing well, the stock market might be. Stocks, bonds, index funds, commodities, and other assets can help you achieve a proper balance.
- Secure more units. Acquiring new commercial properties does present a risk, but there’s value in having additional units in your portfolio. The more units you have, the more insulated you are from the effects of tenant turnover; even if multiple commercial tenants leave, you should still have enough income to stay above water.
The economy is a big, complicated machine that none of us fully understands or controls. That’s why economic uncertainty is such a problem for commercial property investors. However, with these strategies and a bit of proactive thinking, you can effectively manage your portfolio during times of uncertainty and ultimately make a bigger profit. Just keep in mind that all investments bear risk, and no strategy is going to be perfect.
