Which Commercial Properties are the Most Resilient?

Investing in commercial property can offer impressive returns, but knowing how economic cycles affect various types of properties is key to making wise investment choices. Some properties, like healthcare facilities, are largely immune to economic ups and downs, while others, such as office spaces, can face heightened risks. This article explains how economic cycles impact different types of commercial properties and highlights those that tend to be more resilient.

Economic Cycles and Commercial Real Estate

Economic cycles are the natural ebb and flow of the economy, typically broken into four stages: growth, peak, contraction (or recession), and recovery. These cycles affect nearly every aspect of business and consumer behaviour, influencing demand for commercial real estate, rent levels, and vacancy rates. During growth phases, demand for commercial property tends to rise as businesses expand and consumer spending increases. In contrast, during recessions, demand often drops, vacancy rates increase, and rental prices can stagnate or fall.

For investors, understanding these cycles is crucial. It enables them to identify the types of properties likely to maintain stability and income during downturns, while recognising those that may suffer more from reduced demand and rental income. By strategising around economic cycles, investors can protect their assets and sustain returns even in challenging markets.

Office Spaces: Sensitive to Economic Fluctuations

Office properties are particularly tied to business activity and employment rates, which makes them highly sensitive to economic cycles. When the economy is strong, companies tend to expand, leasing more office space and driving rental demand. However, during economic downturns, companies often scale back, reduce office space, or shift to flexible working models that require less real estate, which can lead to higher vacancy rates and lower rents.

The COVID-19 pandemic accelerated a shift towards remote and hybrid working, making office properties more vulnerable to economic changes. Now, companies are often reluctant to commit to large office spaces, opting instead for flexible or short-term leases. While prime office spaces in central business districts tend to remain resilient, suburban or secondary offices are more likely to experience long vacancy periods during recessions. For investors in office space, this heightened sensitivity underscores the importance of location and tenant quality.

Retail Spaces: Highly Sensitive, with Varying Resilience by Type

Retail properties rely heavily on consumer spending, which typically drops during recessions. When disposable income is constrained, consumers cut back on non-

essential purchases, leaving certain retail properties—like fashion boutiques and electronics stores—more vulnerable to economic downturns.

However, not all retail spaces are equally affected. Essential retail properties, such as grocery stores, pharmacies, and convenience shops, are generally more resilient because they provide goods and services that people need regardless of economic conditions. Additionally, the rise of e-commerce has shifted consumer demand, favouring retail spaces that incorporate warehousing and logistics support. This has increased pressure on traditional high-street retail, which faces additional challenges from changing consumer behaviour.

Industrial Properties: Resilient and Sometimes Counter-Cyclical

Industrial properties, including warehouses, manufacturing plants, and logistics facilities, have become known for their resilience. These properties are often less impacted by economic downturns due to their long-term lease structures and their essential role in supporting supply chains.

In fact, during recessions, demand for industrial properties can even rise as e-commerce companies expand warehousing and logistics to meet online shopping demands. This counter-cyclical trend makes industrial properties an attractive investment option for those looking for stability. Warehousing associated with online retail fulfilment, in particular, can see continued growth even during economic slowdowns, proving that not all commercial property sectors respond similarly to downturns.

Healthcare and Medical Facilities: Among the Most Resilient

Healthcare properties, including hospitals, clinics, and specialist medical centres, are some of the most recession-proof investments. Demand for healthcare services is generally immune to economic cycles, as people require medical treatment regardless of economic conditions.

Many healthcare services are also government-funded or subsidised, adding further stability. This makes healthcare facilities an appealing choice for investors seeking steady returns during downturns. The healthcare sector’s essential nature and steady demand mean that properties supporting these services are generally shielded from the economic ups and downs that affect other types of commercial real estate.

Multifamily Residential Units: Stable but Not Immune

Although multifamily residential units, such as apartment complexes, aren’t purely commercial, they are often included in commercial property portfolios due to their investment potential. Multifamily properties are generally stable during economic downturns, as housing remains a necessity, and people are less likely to move during uncertain times.

However, these properties are not entirely immune to recession risks. Economic downturns can lead to higher vacancy rates and rent collection issues as tenants may face financial hardships. Although generally more resilient than office or retail properties, multifamily residential units are not completely shielded from the effects of economic cycles.

Hospitality Properties: Highly Cyclical and Riskier in Downturns

Hospitality properties, including hotels and short-term rentals, are the most sensitive to economic cycles, as they rely heavily on discretionary spending. In a recession, both leisure and business travel decrease significantly, leading to reduced occupancy rates and revenues for these properties.

Despite this risk, hospitality properties in prime locations or those with diversified client bases—such as properties catering to both business and leisure travellers—are better positioned to rebound quickly when the economy recovers. Still, the high cyclical nature of this sector means it is a riskier investment during downturns and may require a long-term view and solid cash reserves to weather economic contractions.

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