When an economic shock or recession hits, all properties are impacted. However, commercial properties must bear most of the brunt because a lower demand in the building, sale, and letting of commercial properties means that businesses cannot function as effectively and contribute to the economy as they normally would.
While that is oversimplifying it a bit, we shall discuss in a bit more detail how commercial properties tend to get affected more by economic shocks than residential ones.
Why commercial properties are impacted more by economic shocks
To understand the subject matter better, we need to first account for how residential properties are affected during an economic downturn.
Residential properties tend not to suffer as much during an economic slump as more affordable housing options become available to homebuyers and tenants. Furthermore, mortgage rates tend to stay low during recessions, as housing associations and builders want to make homes accessible to people who can only afford to pay lower monthly payments.
However, this is not taking into account the other side of the coin: home sellers. During recessions, sellers typically see fewer sales and lower-than-anticipated returns as people do not have the same buying power.
Now, let’s shift our attention to commercial properties. Loans, for example, for commercial properties become harder to obtain during a recession. Interest rates on down payments also go sky-high, making commercial deals harder to close because of strained cash flows.
Businesses face a lot of financial difficulties too which leads to reduced demand for commercial properties. Property values tend to decline, making it more challenging for commercial property landlords to find a business which can afford to rent or buy space. And, as the credit market tightens, companies find it harder to obtain loans to finance their property purchases.
A recession also leads to decreased commercial construction activity, which isn’t the case with residential properties. Businesses are far less likely to invest in renovations or new builds, leading to a general decline in construction jobs, not to mention reduced overall economic activity. Moreover, banks and financial institutions are reluctant to lend money for new builds, which further slows down development.
With all things said, even though economic shocks can severely impact commercial properties, the market eventually recovers, in most cases. Businesses which can brave the downturn and take advantage of certain opportunities available during a recession (such as lower property prices), can effectively position themselves for long-term success.
More importantly, all businesses can benefit from automation and digital tools to streamline their operations during economic hardships. A paper-based or manual approach, for example, can lead to unnecessary costs and resources which can be geared towards other areas of the business to keep it healthy during an economic downturn.
Property and facilities managers, for example, or housing associations can make use of certain software to inspect, report and resolve issues more efficiently.
The Inspection Manager is an innovative piece of software which allows your team to record data, standardise inspections and identify risks.
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