Resilience of Commercial Real Estate Amid GDP Fluctuations
The tariff announcements of early April have sent shockwaves through financial markets and introduced a significant degree of uncertainly into investment decisions.
As the economy had already been showing some signs of deterioration, with leading indicators pointing to a heightened risk of contraction, some industry leaders are suggesting that the economy may be entering recession imminently. While no new major economic data has been released to assess the immediate impact of the tariffs, financial markets are signaling a heightened degree of distress, seen primarily in stock market losses as well as widening credit spreads, which can be early signs of economic weakness.
During the March 2025 Federal Open Market Committee (FOMC) meeting, interest rates remained unchanged (for the second consecutive meeting), leaving the Fed Funds range at 4.25% to 4.50%.The Federal Reserve’s Summary of Economic Projections for 2025 revealed an upward adjustment of inflation to 2.7% from 2.5% and a revised downward forecast for gross domestic product (GDP) to 1.7% from 2.1%. Given the new dynamics introduced by tariffs, we may see the Fed embark on a fresh cutting cycle to provide liquidity and confidence to the markets.
These policy adjustments, specifically tariffs, are leaving many investors uncertain about the future of the U.S. economy, resulting in investors reassessing their investment strategies. For investors interested in long-term commercial real estate strategy, there are real estate sectors that typically perform better regardless of the economic environment.
CRE Sector Sensitivity to GDP
GDP is the total value of all goods and services produced within a country during a given period. It's a key metric used to measure a country's economic performance. As GDP expands, businesses thrive, consumer confidence is high, and demand for real estate increases. Conversely, a declining GDP may signal economic contraction, which can lead to higher vacancy rates and downward pressure on rental prices. GDP trends can directly influence property values and returns on investment.
However, different CRE sectors exhibit varying degrees of resilience to a change in GDP. Historically, self-storage, senior housing, manufactured housing and student housing generally have a lower sensitivity to a one percent positive or negative change in GDP. Simply put, performance of these sectors is less connected to macroeconomic events due to their demand drivers.
Self-Storage
Demand Stability: Driven by life events, or the Four Ds -- death, divorce, downsizing and dislocation – all of which occur regardless of the economic environment.
Counter-Cyclical Tendencies: In economic downturns, people may downsize or relocate, increasing the need for storage.
Low Operating Costs: Compared to other real estate types, self-storage has lower maintenance and operational expenses, making it resilient to economic shifts.
Senior Housing
Needs-Based Demand: The aging U.S. population will require senior housing regardless of economic fluctuations.
Funding Sources: Cost of senior living is often born by non-economically sensitive sources like Social Security and savings, including investments and equity from previously owned homes.
Limited Alternatives: Many seniors require specialized care that home-based solutions cannot provide.
Manufactured Housing
Affordable Housing Demand: Low-income households and retirees on a fixed income rely on manufactured housing as a cost-effective housing option.
Supply/Demand Imbalance: Zoning restrictions and limited new supply ensure steady occupancy rates.
Resident Stability: Residents tend to stay long-term, making cash flows predictable.
Student Housing
Enrollment Trends: Enrollment remains stable or even increases during economic downturns as people seek to improve job prospects.
Limited Substitutes: Students must live near campuses, reducing demand elasticity.
Parental Financial Support: Many students rely on parental contributions or financial aid, buffering against GDP changes.
Understanding the interplay between Federal Reserve policies, GDP fluctuations, and sector-specific dynamics is vital for making informed investment decisions in the commercial real estate market.
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This article was originally published by Inland. Please contact Inland with any questions.
2 Green Street Advisors. Navigating the “Upside Down” in Commercial Real Estate. September 2022.
