There are lots of signs that a recession may be coming. From high inflation, to big layoffs, people are feeling a change in the atmosphere. Obviously, this won't be a good thing for millions of American consumers, employees, and business owners. But what we often overlook when thinking about recessions is the level of opportunity that they can provide.
Recessions are a tricky business, and predicting their arrival is extremely difficult. What we do know is that one is most likely on its way, possibly to start in earnest sometime late next year. While there are so many things that could happen to either speed up or slow down this timeline, what we can be pretty sure about is that a slowdown is approaching.
While this might be a scary prospect for younger investors who began their financial lives well after the Great Recession of 2008, more experienced operators understand the power of this uncertainty.
Not everyone agrees that uncertainty is a bad thing. Existing in a state of uncertainty about the timing and form of a coming recession can be an exciting moment for bold CRE investors. While recent polls have shown that revenue expectations for 2023 are lower than they were last year, we can actually do a lot with that. Lower expectations can lead to lower prices, lowering the bar for investors interested in diversifying their positions.
In March of 2022, the U.S. Federal Reserve (the Fed) began to raise federal interest rates in response to high rates of inflation. This is essentially the Fed’s only tool to slow down spending across the country and mitigate the severity of a coming recession. We’ve already seen the short term effects of these lending rate hikes, but the long term effects are still being figured out.
An overall cautious reaction to rising federal interest rates is one of the reasons that we haven’t yet seen the CRE price corrections that we’re expecting to be hallmarks of the coming recession. When interest rates rise steeply, we often see that corrections take a certain amount of time. This is because different sectors of the CRE market are trying to figure out their new operating profit margin, in relation to other types of assets.
The Commercial Real Estate (CRE) market as a whole won’t be immune to this future downturn. But certain sectors of the market have shown remarkable resilience amidst the turbulent business landscape of the last few years. In many of these places where experts predicted plateaus or dips, we instead saw significant boosts.
As we move into this new moment of uncertain timing, these are markets to keep an eye on. While there’s plenty to be learned from their success over the past few years, they’re also just a reminder that uncertain times often bring unexpected successes.
Life sciences have taken off since the beginning of the COVID-19 pandemic, and it’s not hard to see why. While other sectors were forced to take extended breaks either by law or by necessity, the life sciences sector actually had more work to do. Within weeks, funding for life sciences projects jumped, and people who never would have been able to get funding were handed massive sums. Turns out there’s really nothing like a pandemic to get people into biological R&D.
All kinds of life sciences organizations have expanded in the last few years, from the micro to the macro. Development of vaccines and treatments for COVID required companies to have more space at their disposal. Demand for research space in university towns such as Boston, MA shot up. In 2020 alone, commercial lab space grew a whopping 12 percent.
Across the country and the world, people became more interested in science as a solution to so many chronic problems, not just COVID. While other industries took a break, life sciences blossomed. The U.S. Food and Drug Administration (FDA) approved record numbers of novel drugs in 2020 and 2021, beaten out only once in the last two decades. While there’s no doubt that the life sciences sector was on the rise before 2020, the pandemic changed the game.
Additionally, we’ve seen a shift from outsourcing of R&D spaces in rural areas to increased research space use in the U.S. This “coming home” effect of lab use is often attributed to companies desiring greater proximity to their R&D departments, and an uptick in organizational pride. Suddenly, scientists and researchers were hailed as heroes, and pharma organizations wanted to keep them close.
At the beginning of COVID, prospects in traditional CRE across the country didn’t look all that good. Office work had been suspended, and work-from-home had become the new norm. Corporate headquarters and outposts all around the world became graveyards overnight, tanking value everywhere. People were uncertain about the concept of the office, perhaps even uncertain about the future of the communal work gathering space. At the same time, one might have predicted a similar fall in value for the casual laboratory. Instead, we were hit with a boom.
Investors and property owners who hadn’t moved too quickly to sell their CRE were rewarded for their cautiousness in an uncertain situation, proving the opportunity value of such a moment.
Where life sciences is broad and encompassing, biotech is centered and specific. That’s one of the advantages that has given it such a boost in recent years. Biotech is a field oriented around application of R&D to produce favorable outcomes for our society. Faced with the obstacles of COVID life, biotech has positively thrived. However, the emphasis on practical applications has moved biotech real estate towards laboratory specific spaces. Most companies are looking for the same features, such as the availability of hazardous waste removal services, or temperature controlled environments.
Biotech has also been trending towards city-centric real estate, even though it is often more expensive. There are a couple of obvious reasons for this, primarily that most tech hubs are fed by city-based universities, and that biotech researchers and organizations tend to want to be close to each other. This seems to facilitate the sharing of ideas, funding, and sometimes even development space.
As the biotech industry has evolved since COVID, we’ve also seen more multi-tenant/multi-use buildings. As biotech startups have proliferated the market space, they’ve shown interest in leasing lab space in larger buildings. Sometimes the multi-tenant buildings are used as tech incubators, and sometimes the arrangement is simply put together for financial stability and convenience.
Just as with its parent field of life sciences, biotech is a quickly changing industry that is requiring more specialized real estate every day. As a possible recession approaches, it may be useful to keep a handle on biotech as a specific location for growth in the tech industry.
Logistics companies have also done quite well as we have moved out of the pandemic, defying expectations at every turn. Like life sciences and biotech, they also require a high amount of CRE to perform at the highest level. Between warehouses, fulfillment centers, and distribution hubs, logistics companies need even more volume of space than life sciences, but the requirements for the space are generally less rigorous.
Logistics has grown more than expected, at least partially because of the breakdown of supply chains during the pandemic. So many companies began to struggle when they ran into bottlenecks in the global supply chain for numerous component products that they would then use to produce their own goods. These supply chain malfunctions had huge ramifications for any downstream companies, and created bubbles and artificial price inflations in multiple different markets.
Although this certainly increased the pressure put on logistics companies, it also increased their worth. While some companies failed or were otherwise adversely affected by supply chain malfunctions, many profited from these problems by quickly developing a higher level of supply chain agility. As these companies developed new arteries in global supply chains and solved problems for their clients, they gained value and expanded operations.
This has translated to a newfound value in commercial logistics real estate, as more logistics companies come into their own.
Short of a proper recession, uncertainty in the market offers a certain level of opportunity to those bold enough to step forward. But a key part of taking advantage of this uncertainty factor is moving towards new fields and markets in CRE. As the world changes, so should your business plan.
Rising interest rates from the Fed indicate that they too believe that the possibility of a recession is imminent, and that they’re doing all they can to put the brakes on the economy. The CRE industry is directly affected by these hikes, but it will take time to see the price corrections that these higher interest rates foreshadow. There’s a good chance that as the Fed begins to ease off the rate hikes there will be some extremely interesting opportunities for investors who have kept their powder dry.
Some of the best CRE deals come out of periods of uncertainty, when bold brokers and investors find ways to defy expectations. The developments in the fields of logistics, life sciences, and biotech all took place during a time period that many predicted would turn into a recession. We’re still waiting for that recession to hit. In the meantime, there’s a lot of valuable research and work that you can get done, whether you’re investing, buying, or selling CRE.
Biproxi can help you find exciting new fields to take a closer look at, while not overwhelming your inbox with prospective clients who won’t be a good match for you. Our tech can help you cut down on these unwanted connections from the start, leaving you with only the most tailored opportunities.
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