Ways to Prepare for Recession

by Ryan Moeller

There are two certainties in life – death and taxes. Might as well add one more to that short list – RECESSION. 

Since 1929, there have been 14 recessions. On average, they come every four years and last around nine months in duration. It’s been ten years since the last recession so it seems we may be due for another one here soon.

How close is the next recession?
Depends on whom you talk to, but any discussion around a recession usually starts with the state of the economy.

So, how is the economy doing?
Once again, it depends on whom you ask.

There are bright spots.

Consumer confidence and spending, a popular bellwether for judging overall economic health, seems to be holding up. “The consumer continues to be the driver in the U.S. economy,” said Jack Kleinhenz, chief economist for the National Retail Federation. “Real personal consumption expenditures for 2019 is 2.4% year-over-year growth. It was 2.6% in 2018.” 

Job growth, another bellwether, continues to be strong, with the average monthly growth expected to be 184,000 in 2019 and 139,000 in 2020. In April of this year, the unemployment rate fell to 3.6%, the lowest rate since 1969.

While consumer spending and job growth are bright spots in the economy, there are also warning signs and factors that could throw the economy into decline.

The big concerns among analysts are tariffs and trade policy. “The greatest downside risk is trade policy and increased protectionism,” Kleinhenz said. A trade war could stall growth and fuel a recession by as early as the end of this year.

Another warning sign of an impending recession has been the Fed’s recent rate hikes. Ten of the last 13 rate-hiking cycles (more than 75%) since the 1950s have ended in a recession. Don’t be fooled by recent Wall Street gains many analysts warn. Recent attempts by the Fed to engineer a soft landing by pausing its rate-hiking cycle may have stalled fears of an imminent recession, which explains recent stock gains, but many analysts think the wheels are already in motion for a recession. Johnston, Matthew (Apr 18, 2019), “Why There’s a 75% Chance of a Recession,” https://www.investopedia.com.

In matters of priorities, secured creditors reign supreme.

High-net-worth individuals (“HNWIs”) and institutional investors like university endowments and private foundations are always prepared for recessions. How?

By investing in alternative investments exhibiting the following attributes:

  1. Recession Resistance
  2. Income Production
  3. Inflation Busting

Need proof?

The Yale Endowment, one of the nation’s largest and most successful university endowments, allocates more than 80% of its assets to alternative investments. How did the Yale Endowment do in 2018 when the S&P was down 6.2%? It gained 12.3%.

Yale’s model is a prime example of recession-busting investing. Among Yale’s favorite class of alternative investments is real estate where it consistently allocates 12-20% of its investable assets. 

Not all real estate investments are created equal, however.

Some are more correlated to the broader economy than others. In general, retail and office properties tend to get hit the worst during economic downturns. Other commercial properties such as multi-family assets are less correlated, offering a recession hedge while providing a consistent income stream during a time of uncertainty.

Besides offering a recession-hedge, well-occupied commercial properties with staggered leases and financially sound tenants provide predictable cash flows with fixed income stability that consistently stays ahead of inflation.

Since the National Council of Real Estate Investment Fiduciaries (NCREIF) began tracking private commercial real estate returns in 1978, the NCREIF Property Index (NPI)* has exceeded inflation in 32 of 38 years. The only two periods where inflation exceeded NPI were during the recession of the early 90s and the Great Recession beginning in 2007.

Nobody really knows when the next recession will hit, but we can learn a lot from HNWIs and university endowments who don’t wait around for the warning signs to prepare for a downturn.

They’re always prepared. By removing Wall Street from their investment equation, these successful investors hedge against recessions by investing in alternative assets like commercial real estate that offer inflation-busting income streams that continue even through difficult times.

For individual investors, private investment funds offer the opportunity to invest in commercial real estate assets with consistent income distributions and without the high entry barrier of acquiring properties on their own.

No matter how you get into the commercial real estate segment, what’s important is that you get into it for its recession-hedging, income-producing, and inflation-busting qualities. It’s what successful investors have been doing for decades. 

Partner with Fall Creek to start preparing for the next recession today.