If a Recession Hits, Which U.S. CRE Sectors Shine?

06/19/2025

Industry Insights

For commercial real estate professionals, economic downturns often reveal which assets can weather the storm and which are exposed. If a recession strikes, the impact won’t be uniform across U.S. CRE sectors. Some property types will prove their resilience—maintaining occupancy and income—while others could face outsized stress. Understanding where relative strength lies is crucial for investors and advisors positioning portfolios ahead of a potential 2025 slowdown.

Macro Recession Scenario & Historical Context

Consider a hypothetical 2025 recession scenario: geopolitical shocks or a credit crisis could tip global markets and lead U.S. GDP into contraction. Tighter credit spreads, rising risk aversion, and a softer labor market would define the macro backdrop. Commercial financing would become more expensive and selective. Historically, in the aftermath of Federal Reserve tightening cycles, property cap rates tend to rise (and values fall) with a lag of a few quarters. By the time a recession is underway, those higher cap rates start to materialize, putting a premium on assets with truly durable income streams. In short, when the capital markets retreat, properties that can still demonstrate steady net operating income will comparatively outperform as investors flock to reliability.

Framework for Sector Resilience

A key differentiator in downturns is whether a real estate sector is “defensive” or “cyclical.” Defensive sectors are tied to non-discretionary needs or have built-in demand support (often via government programs or essential services). These tend to hold tenant occupancy and rental rates better when consumers and businesses cut spending. Cyclical sectors, on the other hand, rise and fall more sharply with economic trends or consumer confidence. Beyond broad labels, investors should screen individual opportunities with specific metrics that signal resilience:

Rent-to-income ratios: Lower rent burdens (for residential tenants or business tenants) indicate more affordable space, making tenants less likely to default or vacate under financial stress.
Tenant credit and industry: A rent roll full of high-credit, financially sound tenants (or tenants backed by federal programs) will be safer. Understand the mix of essential vs. discretionary businesses in a property.
Lease duration and rollover risk: Long-term leases with far-off expirations lock in cash flow. Short leases mean exposure to vacancies or renegotiation at a potentially weaker time.
Expense pass-through structures: Properties on triple-net or bondable leases (where taxes, insurance, and maintenance are paid by tenants) insulate the owner from cost inflation. This stability is valuable if operating costs spike during a recession.
Capital expenditure intensity: Asset classes with low ongoing CapEx needs (or ones that can defer upgrades) have a buffer. Sectors that require frequent renovation or high operating staff face more pressure when revenue is flat or falling.

Historically Resilient CRE Sectors

Affordable & Workforce Housing

Rental housing that serves the broad middle and lower-income market is often cited as recession-resilient. Demand for shelter is largely inelastic—people need a place to live in good times and bad. In fact, economic stress can increase demand for affordable units as some renters “trade down” from luxury apartments to more affordable Class B/C communities. Affordable and workforce housing also benefits from underpinning by government programs. Federal initiatives like Low-Income Housing Tax Credits (LIHTC), Section 8 vouchers, and other HUD subsidies provide reliable rent payments or financing support that continue regardless of the economic cycle. This translates to more stable occupancy and collections. During the Great Financial Crisis, for example, tax-credit housing properties maintained roughly 97% occupancy while market-rate apartment occupancies fell closer to 91% – a gap that illustrates how much steadier the affordable segment was in a downturn. Given these characteristics, workforce housing is viewed as a safe haven for both income protection and capital preservation.

Grocery-Anchored Neighborhood Retail

Neighborhood shopping centers anchored by a grocery store have proven their mettle in recessions by focusing on essential goods. The supermarket anchor drives regular foot traffic (people still buy food, toiletries, and medicine even when cutting other spending), which in turn supports the smaller tenants like pharmacies, dollar stores, take-out restaurants, and other necessity retailers. This reliable traffic and sales base make grocery-anchored centers far more resilient than malls or big-box power centers. Shoppers may forego luxury purchases during a downturn, but they can’t avoid weekly groceries—keeping these centers’ parking lots full. Indeed, investors prize the stability of grocery-anchored retail: by early 2025, such centers had average vacancy rates in the very low single digits (on the order of 3.5% vacant nationally, with grocery-anchored deals making up a large share of retail investment activity). While discretionary retail slumps, grocery-anchored assets often hold their value and see quicker recovery once the economy stabilizes, justifying the premium valuations they command. Additionally, value-focused retail concepts (like discount grocers or budget chain stores) actually thrive on the increased price sensitivity during recessions, further bolstering these centers.

Self-Storage

Self-storage facilities are frequently highlighted as “recession-proof” or close to it. The simple reason: life transitions and space needs that drive self-storage usage don’t stop in a recession—they sometimes accelerate. In a downturn, many households downsize to save on housing costs, workers relocate for new jobs, or families consolidate into smaller homes; businesses might close offices or deal with excess inventory. All these situations create demand for storage units to hold belongings or equipment that no longer fit in a downsized living or working space. As a result, move-in rates at self-storage sites can actually increase when the economy contracts. The self-storage business model is also inherently defensive: month-to-month leases allow operators to adjust rents quickly, and operational overhead is low (no expensive build-outs or intensive staffing needed). This means even modest occupancy or rate changes have limited impact on the bottom line. Historical data backs it up – during the 2008–09 recession, self-storage properties saw only minor dips in occupancy and rent, especially compared to other property types. Many facilities stayed near full (industry occupancy often remained in the 85–90% range or above) while sectors like offices and hotels saw far steeper declines. Those consistent cash flows and low capital expenditure needs make self-storage a stalwart performer when economic conditions tighten.

Medical Office & Healthcare Facilities

Healthcare real estate, particularly medical office buildings (MOBs), tends to be insulated from economic swings by the non-cyclical nature of medical demand. People get sick or require medical services regardless of whether it’s a boom or bust year for the economy. An aging U.S. population and broader healthcare utilization trends (more outpatient procedures, an emphasis on preventative care, etc.) provide a steady tailwind supporting medical tenants. Crucially, many healthcare tenants are backed by strong credit (large hospital systems, clinics affiliated with health networks, or practitioners reimbursed by Medicare/Medicaid and insurance). These tenants typically sign long-term leases and invest heavily in their spaces (imaging centers, labs, specialized plumbing/electrical for medical use), making them very sticky — they are unlikely to relocate and disrupt their patient base. As a result, MOBs manage to keep occupancy and rent collections high even during recessions. For example, during the last downturn, the medical office sector’s vacancy rate stayed in single digits and never exceeded about 10%, whereas traditional office vacancies climbed well past 15% nationally. Likewise, healthcare offices enjoy renewal rates that often exceed 80%, far better than general office buildings struggling with downsizing tenants. All of this means that medical offices and related healthcare facilities (like urgent care centers, surgery centers, clinics) maintain stable income when many conventional offices or retail properties may be under severe pressure.

Necessity Industrial (Food & Staples Logistics)

Within the industrial real estate universe, properties that serve as critical infrastructure for essential goods form a recession-resistant niche. These include food-grade warehouses, cold storage facilities, consumer staples distribution centers, and last-mile logistics hubs for household necessities. During downturns, consumer spending shifts: people might defer buying new cars or luxury gadgets, but they continue purchasing groceries, cleaning supplies, pharmaceuticals, and basic consumables. That keeps the supply chains for those essential products moving at healthy volumes. Warehouses and logistics facilities tied to such staples therefore see steadier demand. Even if overall trade volumes or manufacturing output dips, facilities that handle food or medical supplies often run near capacity (and can even see upticks if folks stock up on basics). Additionally, the ongoing penetration of e-commerce has created structural support for industrial demand. Online retailers and delivery services must lease more warehouse space to store inventory and fulfill orders quickly. In a recession, e-commerce growth might slow in discretionary categories, but it tends to hold up or increase for everyday goods as consumers look for convenience and value. This means an Amazon distribution center or a regional grocery chain’s warehouse can remain fully utilized while other industries pull back. Moreover, many industrial leases are triple-net, and these properties are relatively inexpensive to operate, so owners aren’t as exposed to rising expenses. The bottom line is that “necessity industrial” assets combine the two factors you want in a recession: essential demand and low ownership costs. It’s no surprise that major analysts often rank industrial among the top resilient sectors in forecasts. Even during economic turbulence, demand for warehouse and distribution space servicing essential goods can actually increase as companies adjust supply chains and cater to value-focused consumers. Investors accordingly remain keen on logistic assets, confident that these warehouses will keep churning out rent checks through thick and thin.

Sectors Requiring Caution in Recession

Hotels & Hospitality

The hospitality sector is highly sensitive to economic cycles and typically bears the brunt of a recession early and intensely. When businesses start tightening budgets, non-essential travel like conferences, business meetings, and training trips are often the first expenses cut. Likewise, consumers faced with job uncertainty or lower income will curtail vacations and leisure travel. This one-two punch causes hotel occupancy to drop swiftly. Unlike most real estate assets that have multi-year leases, hotels effectively re-lease their “units” (rooms) every single night, so the downturn’s impact is immediate and unmitigated by long-term contracts. Revenue per available room (RevPAR) – the key performance metric for hotels – can swing dramatically with changes in occupancy and room rates. And because operating a hotel comes with high fixed costs (staff, utilities, maintenance of the property whether rooms are filled or not), a decline in revenue goes straight to the bottom line. Historical data shows that hospitality often suffers the deepest revenue declines of any major property type during recessions. A study by CBRE, for instance, found that U.S. hotels collectively experienced some of the largest drops in income in the last two recessions – with many properties seeing RevPAR plunge by over 30%. This volatility means investors must approach hotels with caution in a downturn. Any hotel assets should be stress-tested for worst-case occupancy scenarios, and owners may consider hedging strategies (such as interest rate hedges on floating financing, or maintaining larger cash reserves) to survive the storm. In short, lodging can be one of the first sectors to feel pain in a recession and often one of the last to fully recover once the economy improves.

Luxury & Experiential Retail

Retail properties that rely on discretionary spending – including luxury retail boutiques, high-end shopping districts, and experiential venues – face significant headwinds in a recession. These businesses thrive when consumers have excess disposable income and strong confidence in their financial outlook. In leaner times, however, shoppers cut back to the basics, and upscale or experience-driven retail often sees foot traffic evaporate. Whether it’s designer fashion, jewelry stores, fine dining restaurants, or immersive entertainment concepts, all tend to see revenue fall steeply when wallets close. For example, 2024 saw a notable slowdown in luxury goods sales; industry analysts noted it was one of the worst years for luxury spending since 2009. Physical luxury storefronts in particular are hurting – many have been “suffering from plummeting walk-in traffic” as status-conscious consumers postpone big-ticket purchases and seek value alternatives. Similarly, experiential retail (think boutique fitness studios, theme-oriented bars, or pop-up entertainment attractions) struggles as individuals eliminate non-essential outings from their budgets. The result for landlords is higher vacancy risk and pressure to grant rent relief to keep tenants. Retail assets focused on the luxury or experiential segment can therefore see cash flow dry up quickly in a downturn. Investors might mitigate this by diversifying tenant mix, but overall, these properties remain among the most cyclical and should be underweighted in a recessionary strategy.

Speculative & Trophy Office

Office real estate is already undergoing structural challenges in many markets due to remote work trends, and a recession only compounds the difficulties. In an economic slump, companies in sectors like tech, finance, and professional services often implement hiring freezes or layoffs to control costs. Office footprint expansion plans get put on hold, and some firms look to sublease excess space to shed overhead. This creates a glut of available office space, especially in modern “trophy” buildings that may have opened expecting growth that now isn’t coming. New speculative office developments (those built without full pre-leasing) are particularly vulnerable: they might hit the market at exactly the wrong time, facing minimal tenant demand and heavy competition from subleases in existing buildings. The result is downward pressure on effective rents. Landlords must increase concessions (like free rent periods and larger tenant improvement allowances) to attract the few tenants who are active, eroding net income. Occupancy can dip sharply, and even occupied buildings may see tenants downsizing suite sizes at renewal. Another factor is financing – lenders become very skittish about office properties in a recession, especially if a building isn’t stabilized with long-term leases. Refinancing an empty or half-empty office tower can be extremely difficult, and new construction loans for office projects are nearly impossible to obtain until the outlook brightens. Given these risks, investors should be extremely cautious with office exposure. Well-leased, mission-critical offices (say a build-to-suit headquarters for a strong tenant) can still hold value, but generic multi-tenant offices in oversupplied markets will likely see valuation and liquidity challenges in a downturn.

Market Dynamics & Trend Catalysts

Persistent inflation and interest rates: If core inflation remains “sticky,” the Federal Reserve may keep short-term interest rates higher for longer. Elevated rates translate to higher mortgage costs and required returns, which push property cap rates upward. This repricing pressures values across the board. However, it also means cash-flow stability becomes even more prized — investors will gravitate to properties with reliable income that can comfortably cover the higher debt service and still deliver a spread.
E-commerce plateau but steady essentials demand: The explosive e-commerce growth of the past decade is maturing. We may see online sales growth level off in many categories, especially discretionary retail, as the market saturates. But importantly, the infrastructure built for e-commerce (distribution centers, delivery networks) is now an entrenched part of the economy. Demand for industrial space related to essential goods fulfillment (online grocery delivery, medical supplies, everyday staples) is expected to remain solid even if consumer spending shifts more to services or slows overall. In other words, the e-commerce engine for necessities will continue to support industrial real estate absorption at a healthy baseline.
Rising insurance and taxes in certain markets: Property owners in coastal and high-tax states are facing additional pressure from soaring insurance premiums (driven by recent natural disasters and insurance industry retrenchment) and increasing property tax assessments. In a recession, these cost surges can squeeze net operating income just as revenue growth stalls. Assets with heavy expense burdens, like older buildings with high insurance replacement costs or properties in municipalities with aggressive tax hikes, will feel it most. By contrast, asset classes with relatively low operating expenses (self-storage, some industrial) or structures that pass costs to tenants (triple-net leases on retail and healthcare properties) become even more attractive on a relative basis during such periods.

Strategic Portfolio Allocation in a Downturn

Overweight defensive sectors: Tilt the portfolio toward property types that demonstrate resilient demand and stable cash flow. These include mid-market multifamily (especially Class B/C apartments and affordable housing), grocery-anchored retail centers, self-storage facilities, medical office buildings, and essential-needs industrial warehouses. These sectors have historically shown the ability to maintain occupancy and rent levels during recessions, making them a larger portion of the target allocation.
Neutral or selective on niche assets: Take a case-by-case approach to sectors with mixed outlooks. Data centers and telecom infrastructure, for instance, have strong secular demand (in our digital economy) but can be capital-intensive and tied to corporate IT spending cycles, so underwrite conservatively. Cold-storage logistics is underpinned by food demand and vaccine/pharmaceutical supply chains, but ensure new supply isn’t oversaturating certain markets. Senior housing and care facilities benefit from aging demographics, yet they carry higher operational risk and expenses, so focus only on top operators and possibly align with government reimbursement streams.
Underweight cyclical sectors (or hedge them): Reduce exposure to the categories likely to underperform in a recession: lodging and hospitality, luxury retail properties, and speculative office developments are prime examples. This doesn’t necessarily mean a fire sale of all such assets, but any remaining holdings should be best-in-class (e.g. a flagship hotel with a prime location and strong brand or an office building pre-leased long-term to a government agency). Even then, consider hedging strategies – for instance, offset a hotel position by shorting certain hospitality stocks or ensure an office asset has interest reserves and low leverage to ride out vacancy spikes. The goal is to limit potential damage from these volatile segments.

In addition to sector allocation shifts, a downturn strategy should include financial fortifications. That means using lower leverage overall – many seasoned investors aim for no more than ~50–55% loan-to-value on core holdings when a recession is on the horizon. With less debt, even a drop in income is less likely to cause loan default or distress. It also means securing fixed interest rates or caps on floating-rate debt, so that interest expenses don’t skyrocket if rates remain high or volatile. Having substantial liquidity reserves is another cornerstone: maintaining cash or credit lines sufficient to cover at least 12 months of debt service and operating expenses for each property. These reserves act as an insurance policy, allowing owners to avoid forced sales at a cycle bottom and giving them the ability to capitalize on any attractive acquisition opportunities that arise.

Another tactical consideration is exploring mezzanine debt or preferred equity investments in the more recession-resistant sectors. For example, an investor might provide mezzanine financing on a portfolio of grocery-anchored shopping centers or take a preferred equity stake in a group of apartment communities. These positions sit senior to common equity, potentially offering high-single-digit or low-double-digit yields with a bit more protection if values slip. In a downturn, being higher up in the capital stack (while still secured by fundamentally solid assets) can deliver strong risk-adjusted returns. It’s a way to stay invested in favored sectors with an extra margin of safety, complementing the common equity holdings in the portfolio.

Financial & Risk-Management Considerations

Rigorous stress testing: Re-run the numbers on each asset under pessimistic scenarios. What if net operating income drops 10%? 15%? Ensuring the property can still cover its debt service comfortably (maintaining a healthy DSCR) under those conditions is ideal. If not, you may need to restructure financing or bolster reserves now. Likewise, assume cap rates could rise further in a recessionary sales market – when analyzing potential deals or exits, model your eventual sale at, say, 1.0% to 1.5% higher cap rate than today’s level. This conservative underwriting protects you from overpaying based on rosy assumptions.
Tenant credit focus: In tough times, the creditworthiness of your tenants is paramount. Analyze each major tenant’s financial health and industry outlook. Properties anchored by investment-grade corporations, essential service providers, or government entities offer far more security. For instance, a shopping center anchored by a high-credit grocer or pharmacy chain is less likely to see default than one anchored by a trendy retail start-up. Similarly, an office building leased to a state government or a clinic funded by Medicare reimbursements has some insulation. Diversify tenant mix where possible, but more importantly, favor assets where a majority of the rent roll comes from tenants who are likely to withstand an economic contraction.
Lease expirations and rollover risk: Pay close attention to your lease maturity schedule. A property might look stable on paper, but if 30% of its leases (by square footage or income) expire in the next 18–24 months, a recession could severely disrupt its cash flow when those tenants decide whether to renew. Assets with concentrated near-term lease rollover warrant either a pricing discount or a plan to actively secure early renewals or replacements. In practice, that could mean negotiating extensions now with key tenants to push expirations beyond the recession window, even if it means making some concessions. Where you can’t avoid big lease cliffs, be realistic in your cash flow projections (assume downtime and re-leasing costs) and set aside extra capital reserves to cover potential vacancies.

Tax & Regulatory Nuances

Support for affordable housing: Downturn-resistant sectors like affordable multifamily often have embedded government support that investors should fully leverage. The LIHTC program, for example, provides significant tax credits for building or preserving low-income housing, which can substantially boost returns or buffer losses during a recession. Properties with Section 8 voucher tenants or project-based rental assistance receive steady HUD-backed rent payments, shoring up income even if local market rents soften. Similarly, initiatives like HUD’s Rental Assistance Demonstration (RAD) can convert public housing income streams into long-term Section 8 contracts, improving an asset’s financial stability. Investors in this space need to stay abreast of funding allocations and potential expansions of these programs (as sometimes happens in stimulus legislation) to maximize the benefit.
Energy efficiency incentives: In a slower economy, any avenue to improve net operating income is valuable. Federal tax incentives like the Section 45L tax credit (which rewards new energy-efficient multifamily construction or renovations) and the Section 179D deduction (for energy-efficient commercial building improvements) can effectively put money back in an owner’s pocket. For example, an apartment owner who retrofits lighting, HVAC, and insulation to certain standards might qualify for a per-unit tax credit under 45L, directly boosting after-tax cash flow. An industrial or retail owner who installs solar panels or high-efficiency systems could take a sizable one-time deduction under 179D. These incentives not only encourage property upgrades that reduce operating costs, but they also provide immediate tax savings that bolster the bottom line during lean years.
Watch for stimulus measures: If a recession is severe, government relief programs or stimulus bills could be enacted that impact CRE. Infrastructure spending packages might fund improvements that benefit industrial and logistics real estate (e.g., grants for cold storage tied to food security, or modernization of supply chain infrastructure). Housing stimulus or recovery legislation could channel money into affordable housing development or rental assistance, indirectly aiding landlords in those areas. There has also been discussion in policy circles about encouraging development in “retail deserts” – for instance, enhancing Opportunity Zone benefits or creating new tax credits for bringing grocery stores to underserved communities. An investor with an eye on policy can sometimes align their strategy to take advantage of these moves, by having projects teed up that fit the criteria once new incentives become available.

Opportunistic Plays During Downturns

Distressed note purchases: Not all opportunities in a recession involve buying physical properties at a discount; some of the savviest moves are in the debt space. Banks and lenders may be looking to offload non-performing or high-risk loans, often secured by quality real estate where the borrower is in temporary trouble. Acquiring distressed notes (loans) on assets you’d be happy to own can be a way to step into a great property at a reduced price. For example, if a top-tier apartment building’s owner is underwater on a loan, an investor might buy that loan from the bank at, say, 80 cents on the dollar. They can then work out a favorable deal with the owner or foreclose and take title to the asset, effectively acquiring the property at a steep discount to its intrinsic value. This requires real estate expertise and legal acumen, but during downturns there are often a number of such notes trading in the market for those prepared to act.
Sale-leaseback transactions: A recession often forces even healthy companies to seek liquidity. One way they do this is by tapping the value of owned real estate. Sale-leaseback deals involve an owner-occupier (for instance, a regional grocery chain or a manufacturing company) selling their facility to an investor and simultaneously signing a long-term lease to remain in place as a tenant. For the company, it frees up cash that was tied in the bricks-and-mortar; for the investor, it’s an opportunity to purchase a fully occupied property with a built-in tenant commitment. In downturns, the volume of sale-leasebacks tends to rise, especially with investment-grade companies that prefer not to take on more debt. Investors can focus on mission-critical properties – say a food processing plant or a medical clinic headquarters – where the tenant is very unlikely to default on the lease. Yields on these deals can be attractive relative to bonds, and the investor gains the security of a credit tenant on a net lease. Essentially, it’s a way to get defensive real estate exposure with the tenant’s business strength as an added backstop.
Adaptive reuse and redevelopment: Downturns can change the highest and best use of certain properties, opening the door for creative repositioning plays. A prominent example today is the conversion of obsolete office buildings into other uses. If a downtown office tower has high vacancy and dim prospects in a work-from-home era, an investor might acquire it at a bargain and convert the building into residential units or life-science labs, provided zoning and floorplate layout allow it. During recessions, construction costs can sometimes be lower (contractors are hungry for work) and cities may be more amenable to rezoning or fast-tracking adaptive reuse projects to revitalize struggling areas. Other value-add ideas include turning vacant retail big-box stores into self-storage or fulfillment centers, or repurposing underutilized parking structures into last-mile delivery hubs. These opportunistic projects are complex, but when executed well, they can turn a distressed asset into a high-performing one for the next cycle, capturing outsized returns.

Technology & Operational Levers

AI-driven rent optimization: In multifamily and self-storage portfolios, advanced property management software powered by artificial intelligence is becoming a game-changer. These systems analyze occupancy trends, leasing velocity, and market comparables in real time to adjust pricing and promotions. In a recession, this can be particularly valuable: if demand softens, the algorithm might recommend slight rent discounts or added move-in incentives on certain unit types to keep occupancy up, preventing revenue-killing vacant units. Conversely, for assets still seeing solid demand, it will push rents to ensure no money is left on the table. This dynamic pricing approach, long used by airlines and hotels, helps owners maintain an optimal balance between occupancy and rate. It effectively “smooths out” human error or delay in reacting to market shifts, thereby protecting income better than static one-size-fits-all rent policies.
IoT-based expense control: Another operational lever during a downturn is cutting costs without compromising the tenant experience. Enter the Internet of Things (IoT) and smart building technologies. Grocery-anchored retail centers, for instance, have significant common area and exterior lighting, HVAC for stores, and refrigeration for grocery tenants. Installing IoT sensors and smart controllers can trim those energy costs by automating efficiencies (dimming lights when parking lots are empty, optimizing HVAC runtimes based on weather and occupancy, etc.). Similarly, in warehouses, smart energy management systems can reduce heating or cooling when bays are not in use and alert operators to maintenance issues before they become costly failures. The reduction in utility bills and maintenance expenses directly cushions the NOI. During a recession, such savings can be the difference between meeting debt covenants or breaching them. Owners who embrace proptech solutions to run leaner operations will find their properties far more resilient against income pressures.
Telemedicine and decentralized healthcare: The pandemic greatly accelerated telehealth adoption, and even post-pandemic, digital healthcare remains a growth area. Rather than reducing the need for medical space, telemedicine is changing the format and distribution of that space. Healthcare systems are establishing more outpatient clinics, urgent care centers, and micro-hospitals closer to residential areas to complement virtual care. These facilities often handle follow-up visits, diagnostics (labs/imaging), and procedures that can’t be done over a video call. The implication for real estate is an expansion of demand for well-located medical office space in communities (as opposed to solely on big hospital campuses). Investors can capitalize on this by developing or repurposing properties for healthcare uses and ensuring they have the tech infrastructure (broadband connectivity, teleconferencing-capable exam rooms) that modern providers need. In a recession, healthcare remains one of the most stable demand drivers, and technology is enabling cost-effective delivery of care in outpatient settings, so positioning properties to serve that trend can yield very steady occupancy and long-term leases from healthcare tenants.

Frequently Asked Questions

Are self-storage facilities truly recession-proof, and what occupancy metrics validate that claim?

“Recession-proof” is a strong term, but self-storage comes close. The sector’s performance in past downturns has been remarkably stable. During the Great Recession, for example, while office buildings and shopping centers saw vacancies and rent drops spike, self-storage facilities on average maintained high occupancy levels – often in the upper 80s to 90% range. Operators achieved this by flexibly adjusting rents and offering promotions to keep units filled, and because many individuals and businesses facing financial strain turned to storage (for downsizing, moving, or inventory management). Rental rates in self-storage did experience some pressure, but declines were modest and shorter-lived compared to other property types. These metrics validate the asset’s resilience: even under economic duress, people continue to need storage for life transitions, and the relatively low cost of a storage unit means it’s rarely the first expense to cut. So while no real estate is 100% recession-proof, self-storage has proven through multiple cycles that it can sustain occupancy and cash flow when most others falter.

How do affordable housing cap rates behave when credit markets tighten?

Affordable housing cap rates tend to be less volatile than those of many other asset classes during periods of tight credit. In a liquidity crunch, buyers of commercial real estate often demand higher cap rates (lower prices) broadly, but affordable housing has some unique support. For one, the buyer pool often includes mission-driven investors, nonprofits, and government-backed agencies who continue to transact even when traditional capital pulls back. These groups value the steady, subsidy-supported income stream, so they aren’t as prone to demanding big discounts. Additionally, financing for affordable housing (such as FHA multifamily loans, tax-exempt bonds, and CRA-motivated bank loans) remains more available relative to conventional development loans during recessions. That means transactions can still happen without cap rates skyrocketing. Historically, while luxury apartment cap rates might jump up significantly in a credit squeeze, cap rates on LIHTC or workforce housing assets have moved only mildly upwards or sometimes even held flat. The enduring investor appetite for stable, affordable rentals often balances out the higher interest rates. In short, affordable housing cap rates are buffered by consistent demand and specialized financing, making them comparatively slow to expand even when credit is tight.

What distinguishes grocery-anchored centers from power centers in a downturn?

The key difference lies in the type of consumer draw and how essential that draw is. Grocery-anchored centers revolve around supermarkets – a source of daily/weekly needs. In a downturn, that grocery store continues to pull in shoppers regularly because people have to buy food and household basics regardless of economic conditions. This traffic benefits the adjacent tenants (think of the pet supply store, the pharmacy, the take-out sandwich shop in the same plaza). The center as a whole sustains a baseline level of activity and sales. A power center, by contrast, is typically anchored by big-box retailers that often sell more discretionary goods (electronics, fashion, sporting goods, etc.). In a recession, consumers cut spending on those non-essentials, so those anchor tenants see sales declines and fewer shoppers coming in. As a result, the smaller stores in a power center (perhaps a furniture outlet, a boutique, a gym) also suffer from the reduced foot traffic. Moreover, grocery anchors tend to sign long leases and rarely go dark – they are essential infrastructure. Big-box anchors in power centers (like department stores or large specialty retailers) are more prone to closing stores or bankruptcies when the economy sours. In summary, the grocery-anchored center has a built-in resilience because it caters to needs, whereas a power center is more exposed to the whims of wants, making the former much steadier during downturns.

Does medical-office performance correlate more with demographics or with broader economic cycles?

Medical office performance correlates far more with demographic and healthcare trends than with the general economic cycle. The demand for medical services is primarily a function of population size, age, and health needs, along with healthcare policy factors – all of which tend to evolve independently of short-term economic ups and downs. For instance, as the population ages, there is a growing need for medical services (geriatric care, diagnostics, chronic disease management), which boosts demand for medical office space consistently year after year. That steady drumbeat doesn’t stop just because GDP growth turns negative for a couple of quarters. By contrast, in a traditional office sector, demand is tightly linked to economic growth and employment trends. Now, medical offices can feel indirect effects of a recession (a patient might defer an elective procedure during a tough year, or healthcare systems might delay expansion plans slightly), but these are marginal influences. Empirical evidence from past recessions shows medical office occupancies and rents holding quite stable, while other commercial properties saw big swings. So, demographics (like the aging baby boomers) and the structure of healthcare (shift to outpatient care, insurance coverage expansions) are the dominant drivers for MOB performance. Economic cycles play a secondary role, mostly affecting things like how easily new projects get funded or modest fluctuations in elective healthcare utilization.

How can investors hedge hospitality exposure without exiting the sector entirely?

Investors who want to stay in the hotel game but reduce their risk can use a few strategies to hedge exposure. One approach is to rebalance the hospitality portfolio toward segments known to be more recession-resilient. For example, extended-stay hotels and budget/economy hotels tend to perform better in downturns than luxury resorts. Extended-stay properties often serve guests like traveling nurses, construction crews, or families in transition, which provide a steady base even when leisure travel slows. Budget hotels capture travelers down-trading from higher-end options. By tilting toward these types of hotels, an investor can buffer some downside. Another hedge strategy is via public markets and financial instruments: an investor could take a position in a hotel REIT index or a hospitality ETF, which provides diversification across hundreds of hotels. If one owns specific hotels, they might also short the stock of a vulnerable hotel chain or buy put options as a form of insurance against sector-wide declines – essentially offsetting losses in the private assets if the industry tanks. Additionally, negotiating fixed-rate financing or credit lines on hotel assets helps; it doesn’t hedge demand, but it hedges interest rate risk and gives flexibility to withstand a revenue dip. Some owners even arrange interest reserve accounts or contingency capital that kicks in if RevPAR falls below a threshold, which is an internal hedge of sorts. Finally, one can pursue “asset-light” exposure: for instance, invest in hotel management companies or franchise royalties rather than owning bricks-and-mortar – these often have more stable fee income. In combination, these measures let an investor participate in a hospitality recovery while having some protection if the recovery is delayed.

Which debt structures best insulate portfolios against NOI shocks during recessions?

The optimal debt structure in a recessionary environment is one that prioritizes stability and flexibility. Long-term, fixed-rate debt is a cornerstone of insulation: locking in an interest rate for 7, 10, or even 15 years means you won’t face rising debt service if broader rates climb or if credit spreads widen due to economic stress. Your mortgage payment stays predictable even as other expenses or vacancies fluctuate. If you must use floating-rate debt (for example, on a bridge loan or construction loan), buying an interest rate cap or swap to set a maximum rate is critical – it’s like an insurance policy on your debt costs. Another feature is longer amortization or interest-only periods. During a recession, an interest-only loan (even if just for a few years) keeps payments lower, which can be a relief if NOI dips temporarily. Non-recourse loans with “good news” provisions can also help; they allow flexibility like funding reserves or rebalancing collateral without triggering default. Keeping leverage moderate ties into this as well – a property at 50% LTV has more cushion to absorb an income drop than one at 80% LTV, meaning it’s less likely to trip covenants or require a capital call. Staggering debt maturities across your portfolio is another tactic: you don’t want a large portion of loans all coming due in the middle of a recession credit crunch. By laddering maturities, you reduce refinance risk at any single point. In summary, fixed rates, longer terms, moderate leverage, and built-in protections (like caps and reserves) collectively form a financing strategy that can withstand a hit to NOI far better than short-term, high-leverage, or floating exposure would.

Are there tax incentives unique to downturn-resistant asset classes (e.g., LIHTC, Opportunity Zones in necessity retail deserts)?

Absolutely. In fact, some of the most significant real estate tax incentives are tied to exactly those asset classes that tend to hold up in recessions. We’ve discussed LIHTC (Low-Income Housing Tax Credits) in the context of affordable housing – that program not only produces social benefits but also gives investors a dollar-for-dollar tax credit, which significantly boosts after-tax returns on affordable housing projects and provides a cushion during downturns. It’s essentially a built-in stabilizer for that asset class. Opportunity Zones, while broader in scope, are often used to drive investment into underserved areas, which can include developing grocery stores in food deserts or rehabbing warehouses in economically depressed zones. If you invest capital gains into an Opportunity Zone project (say a necessity retail center in a low-income community), you can defer and reduce those gains taxes, and if you hold the project 10 years, any new appreciation can be tax-free. This program gained traction after 2018 and, although it’s not recession-specific, it directs capital toward projects that might otherwise be overlooked – many of which are needs-based real estate that can be resilient (like affordable apartments or community healthcare centers). Beyond those, there are New Markets Tax Credits that encourage development of community facilities and commerce in low-income areas – often used for projects like health clinics, fresh food markets, or industrial job-creation sites. Those credits can cover a sizable portion of project costs. On the energy front, the 179D and 45L incentives we mentioned reward investments that make properties greener and cheaper to operate, indirectly bolstering their resiliency in tough times. In summary, the tax code does offer carrots for investing in housing, infrastructure, and community-oriented assets that are frequently the same segments investors flock to for safe harbor during recessions. Savvy investors will layer these incentives into their strategy to improve returns and mitigate risk further.

Execution Checklist for Recession-Aware Allocation

Reassess portfolio mix using stress scenarios: Take your current CRE portfolio and model how it performs under a recession case (e.g., assume a certain drop in NOI for each asset, higher vacancy, and no rent growth). Compare this to your target or required returns. Then re-benchmark your sector allocations: if you’re overweight in properties that underperform in the stress test, plan to pare those down. The idea is to reallocate capital now toward the sectors and specific holdings that demonstrated resilience in the model. This may mean selling some assets or delaying certain investments in favor of bolstering exposure to the likes of multifamily, necessity retail, etc., as identified earlier.
Tighten underwriting assumptions: Going forward, underwrite new deals with much more conservative figures. Build in higher vacancy allowances (assume it takes longer to lease up space and that you might see more move-outs). Project slower rent growth – or even slight rent declines in the first year or two if that’s plausible for the market. Use exit cap rates in your models that are at least a full percentage point above today’s prevailing cap rates to account for a softer sales market. Basically, err on the side of caution for every input. It’s better to be pleasantly surprised with an asset outperforming a low bar than to be caught because you assumed aggressive leasing or refinancing terms that don’t materialize in a recessionary climate.
Fortify financing and lender relationships: Begin conversations with lenders who have a track record of remaining active in downturns. In residential and multifamily, that might be agency lenders (Fannie Mae, Freddie Mac) who often increase lending when banks pull back. In healthcare and certain commercial assets, SBA loans or HUD programs can be lifelines, so know the brokers and banks who specialize in those. For retail and industrial loans, CMBS conduit lenders or life insurance companies sometimes step in with interest in necessity-based assets even during slowdowns. By cultivating these relationships, you ensure that if you need to refinance or if you spot an acquisition opportunity in a recession, you have potential financing partners at the ready. Also, consider arranging credit lines or refinancing now (before a downturn) to lock in terms and have capital available.
Maintain “dry powder” for opportunities: One hallmark of successful investors is having liquidity when others do not. As part of your strategy, set aside investment capital (or make sure you have access to equity partners) specifically reserved for downturn deal opportunities. Make a shortlist of high-quality assets you’ve long wanted – perhaps that Class A apartment in a prime market or a top-tier retail center in your region – and monitor them. If values correct significantly or if you hear of distress (an owner facing loan maturity, etc.), you’ll be in position to move quickly. This may also involve streamlining your internal decision-making so you can underwrite and execute faster than competitors. Having cash on hand (or readily available through funds and JVs) in a recession allows you to be the buyer who can close when few others can, potentially acquiring premier properties at 20-30% discounts from peak pricing.
Optimize tax and regulatory benefits with advisors: Engage your tax advisors proactively to ensure you’re capturing every incentive available. For example, if you plan capital improvements, time them to qualify for tax credits or accelerated depreciation. If you haven’t done a cost segregation study on your properties, a recession (when every cash flow boost helps) is a good time to identify components that can be written off faster for tax purposes. Explore structuring new investments to utilize Opportunity Zone benefits if the location qualifies – the tax deferral and potential tax-free exit can dramatically improve net returns, which is invaluable in a low-growth period. If legislation is brewing that could aid certain sectors (say a federal infrastructure bill that subsidizes broadband facilities, or a state-level grant for converting offices to affordable housing), be ready to act or apply. In short, coordinate closely with accountants and attorneys to make sure no available financial edge is left on the table during a downturn.

Ultimately, economic contractions tend to redistribute real estate value rather than destroy it. By proactively shifting toward assets anchored in life’s necessities and by keeping leverage and risk in check, investors can preserve their income streams through the storm. Even more, they can be poised to seize the moment – turning distress into opportunity by acquiring choice properties at cyclical lows. In this way, a recession transforms from a threat into a strategic advantage for those prepared to act with discipline and insight.