The effect of a recession is different for commercial property than it is on residential. The housing market will take a hit more directly than commercial properties do. So, what happens to commercial real estate in a recession?
Changes in Value
Commercial real estate in Oklahoma and elsewhere has a value based on the net operating income. The NOI is the gross rental income minus the operating expenses. A decrease in tenants in commercial property will reduce the NIO, which takes down the property’s appraised value. No one enjoys a recession, but it does create a buyers’ market, making it the ideal time to invest in commercial real estate in Oklahoma. Additionally, a recession will not last forever. Many investors survived the last recession by staying patient and waiting for the next phase of the Real Estate Market Cycle.
The Real Estate Market Cycle
Recession is actually the final stage of the Real Estate Market Cycle, so it is important to know what happens to commercial real estate in a recession. In the beginning, owners have trouble accepting the NIO changes, but prices will continue to decline. The peak of a recession is often seven months after it begins. Soon, however, the cycle changes with the recovery, so purchasing during a recession is not a bad idea.
Recovery begins as unemployment and property vacancies decline for several months. The recovery period is a great time to invest in commercial real estate in Oklahoma because your property value will increase without too long of a wait.
After recovery, comes expansion. Here is where you see the value of your commercial real estate in Oklahoma increase. Signs of expansion include construction, low vacancy rates, and increased rent. You can still discover properties to buy, but they will be challenging to find.
As the market expands with construction, property values will remain high, but rents will start to decrease due to saturation. This phase comes before a recession. It is not the ideal time to make a purchase, but rare opportunities may present themselves.
Working with an expert will help you understand where you are in the real estate market cycle. At Horizon Commercial Real Estate, we are happy to advise you on the best time and properties to purchase so that you have an excellent return on your investment.