What’s the best defensive sector of commercial real estate in a downturn?

The Denver Broncos have one of the best defenses in the NFL football league. I would compare their position in the NFL with health care real estate in the commercial real estate sector. Health Care real estate is a very defensive asset class because people always use health care and health care facilities regardless of the economy. As the population grows, demand for health care increases hence more demand for health care related real estate in well located areas. Here are a few examples why.

  1. According to The Intelligent REIT Investor, rising unemployment, decreased corporate spending and decreased consumer spending do not have any impact on the demand for health care real estate space.
  2. The total returns of different property types during the 2007-2008 global financial crisis ranked as follows:
    • The worst: Mortgage and Hybrid REIT’s at -46%.
    • Second worst: Hotels at -41%.
    • The best: Health care real estate with only a -5% return during that period. (NAREIT)
  3. Tenant retention in the health care space is typically very strong. The mix of tenants can differ widely from one location to another. It is important to find the right mix of tenants to occupy a medical building. Regardless, once the right tenant mix is achieved, tenants are highly unlikely to leave, since the synergies they have created with each other cause them to rely on one other in order to provide services to their patients. In addition, build out costs and client loyalty encourage medical practices to stay in the same location.

So, while your quarterback is out scoring touchdowns in the form of income producing returns, make sure you in the most defensive commercial real estate for a great hedge against an economic slowdown.