Should You be Getting Your Portfolio Ready for A Downturn?

By Dennis Kaiser

Content Sponsored by JPMorgan Chase

Market volatility abounded as 2018 ended, and as 2019 rolls along, the big question has been: are you ready for a downturn? It is time to take stock of your real estate portfolio and find out how to prepare.

The results of a special survey with JPMorgan Chase show what your commercial real estate peers think is coming next in the market, and what their recommendations are for navigating choppy waters. Respondents from across the CRE spectrum, from owners, investors, developers and finance pros, answered a few questions recently about what their approach is now.

Among the top-level findings were that the majority of respondents don’t see an economic downturn on the horizon until 2021, while nearly half of respondents predict a slowdown in 2020.

When asked to identify their greatest concerns when it comes to a downturn, respondents indicated their primary issues were reduced budgets and operating funds, as well as the loss of steady tenants. Those two concerns were followed by rent competition. Interestingly, interest rates, though a much-focused topic amongst economists and in the media, fell behind on the concern meter, while tightening credit and access to funds was even less of an issue for respondents.

“A primary objective of our Real Estate Banking business is to consistently deliver for our clients through real estate cycles. We focus on top tier real estate professionals who invest in institutional quality projects. These projects are of quality and in locations which perform even as real estate fundamentals deteriorate. Today, our clients are more guarded with new investments…most feel growth is slowing and are more cautious with new real estate investment decisions. We agree there is heightened risk, but we continue to be active with product that will weather a downturn,” said Joe Griffith, J.P. Morgan Real Estate Banking South Regional Manager.

The main ways companies are preparing for a downturn tended to focus on activities that resulted in lower debt loads, higher liquidity or building war chests. Ensuring portfolios are optimized, whether through securing higher credit tenants, maximizing rents, solidifying and retaining tenants or tightening operating expenses, are savvy strategies, say respondents.

Specifically, the actions taken ranged from divesting properties that had realized appreciation gains, diversifying portfolios and refinancing assets to capitalize on the continued low interest rate environment, to acquiring assets under a value-add strategy with an intent to quickly sell. Regardless of the approach, respondents noted it was key not to over-leverage in this environment.

About half of respondents indicate they plan to stay the course, rather than explore alternative investments or different property sectors as a way to prepare for a downturn. They say sticking to where their experience is, is a sound strategy. Even if they expand to a new market, they believe it is better to deal with an unknown market than an unfamiliar asset class.

“In Commercial Mortgage Lending, we bank clients who have weathered multiple real estate cycles and are in the industry for the long term. Many of our clients have been sitting on the side-lines due to heavy competition and what they feel is above market prices. They will be ready to take advantage of opportunities in a downturn, and we are prepared to continue lending and supporting our clients through all real estate cycles,” said Troy Applegate, Head of Chase Commercial Mortgage Lending.

For those who plan to look at different property types, they say holding to a conservative approach is key. Among the strategies being explored include an acute focus on marketing existing listings and vacant land; looking at discount tenants such as dollar stores; considering holding more treasury bonds; and exploring smaller footprints.

Among the keys to remaining competitive in a downturn, most respondents indicated they are most keenly paying attention to interest rates and finding ways to make building upgrades. They also say it will be important to know about tenant demographics, as well as gaining advice about portfolio buying and selling strategies.

For comments, questions or concerns, please contact Dennis Kaiser