Understanding Risk Levels of Different Commercial Asset Types During Recessions

Recessions can be a challenging time for investors, especially when it comes to choosing the right commercial asset type to invest in. Some properties can offer a low-risk investment, while others may be extremely high risk. In this article, we will discuss different commercial asset types and rank them from the lowest to the highest risk levels during recessions.

  1. National Credit Tenant NNN (Extremely Low Risk): NNN or triple net lease properties are leased to tenants with a credit rating of A to AAA. These tenants include retail giants such as Walmart or Home Depot. These properties are almost risk-free and are generally very expensive. During a recession, credit tenants like these are less likely to miss lease payments. You’re much more likely to be struck by lightning.
  2. Class A & B Multifamily (Very Low Risk): Class A and B multifamily properties are among the most stable investments during a recession. These properties cater to affluent tenants who have good incomes and savings, making them less likely to default on rent payments.
  3. Mobile Home Parks and/or Communities (Low Risk): Mobile home parks are low-risk investments as the majority of the mobile homes are owned by the tenants, not the park. The tenants take pride in homeownership and maintain their homes and yards in tip-top condition.
  4. Senior Housing (Low Risk): Senior housing is another low-risk investment. Tenants of senior housing often have retirement income, which is more reliable than a job.
  5. Class C+ Multifamily (Low Risk): During a recession, class C+ multifamily properties tend to remain full as they cater to the middle-income market.
  6. Medical Office (Low Risk): Medical office buildings are some of the safest investments in office properties, with the highest rents. The aging population increases the demand for medical care, making medical offices a low-risk investment.
  7. Flex Industrial (Low Risk): Flex industrial properties are leased to business tenants who take pride in maintaining their shops. These properties tend to remain 100% occupied as tenants know that their spaces are in high demand.
  8. Student Housing (Moderately Low Risk): Student housing is a moderately low-risk investment. Ensure that all tenants sign a one-year lease to reduce the risk of low economic occupancy during summer breaks.
  9. Self-Storage (Moderately Low Risk): Self-storage facilities with an occupancy rate of 85% or more and under-market rents are a moderately low-risk investment. These properties have low expenses and a low occupancy break-even point.
  10. Class C and C- Multifamily (Moderate Risk): Class C and C- multifamily properties tend to remain full during recessions. However, rent collection problems resulting from tenants losing their jobs make these properties higher risk.
  11. Mixed Use (Moderate Risk): Mixed-use properties can be class A to C but have a substantially higher risk if they average 25% or more office or retail on the first floor. This hurts the break-even point during a recession if commercial tenants move out.
  12. Retail (Moderately High Risk): Retail properties can be a moderately high-risk investment during a recession. Buying at a lower leverage point where the property can run profitably at 70% occupancy can make this property type recession-proof.
  13. Office (Very High Risk)” Offices do not fare well during recessions, making them a very high-risk investment.
  14. Hospitality (Very High Risk): Hotels and other hospitality properties are among the highest risk commercial investments during a recession.

In conclusion, understanding the risk levels of different commercial asset types during recessions is crucial for any investor. Choosing the right property type can help you make a sound investment decision, even during uncertain economic times. Always do your research and seek professional advice before investing in any commercial asset type.

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