There are a lot of definitions for a double-dip recession – some of them disgusting and all of them dire.  Generally, the following is the technical definition:

The economy fails to generate positive Gross Domestic Product (GDP) for two consecutive fiscal quarters, recovers with at least one positive quarter, and then drops into the negative again for two additional consecutive fiscal quarters.

Imagine showing a cup of water to a friend dying of thirst, then pulling it back at the last minute — or dropping into a deep slump, then hitting a game tying home run, and slumping again?  Double dipping is akin to adolescent teasing – more harmful than showing no relief at all because it cuts the heart out of hope.  It means nothing if you are in lower, unenviable recession-proof businesses like tombstone sales, sewage disposal or tax collection – all recession proof. For the rest of us, however, an economic double dip is a harbinger of long and sustained stress on our lives.

Building Engines is a Commercial Real Estate (CRE) Web and Mobile Property Management and Operations SoftwareFor commercial real estate owners, double dipping can be devastating.  A “trailing indicator”, commercial real estate follows on an economic trend.  Protected by existing long-term leases, commercial real estate owners are not subject to the short-term ups and downs of the economy.  When a recession begins, commercial landlords are insulated from immediate harm because their lessees continue to pay the same structured rent no matter the current economic state.  Unlike hotel owners who, with single night commitments, feel the pain immediately, commercial owners have long-term commitment security.

On the other end of a recession, that lag can be painful but promising.  When the economy begins to recover, lessees begin to grow as employment and occupancy rates rise.  A well positioned commercial landlord can essentially “bridge” the recession with long term leases.  Growth may be slowed as tenants refill shadow space – unoccupied leased office space that has not been factored into the market’s vacancy rate.  Yet while that space gets reabsorbed, the asset will continue to throw off cash and then grow in value as the recovery matures.

However, an economic double dip will expand that recovery timetable and can collapse that bridge into bankruptcy or worse.  Faced with long term occupancy erosion and strong downward pressure on lease rates, Landlords may be forced to terminate capital improvement plans, settle for portfolio-wide lease rate reduction – all of which will seriously devalue their properties and result in higher cap rates.   Over leveraged properties are at a higher risk.  Cash flow erosion may lead to delayed or unpaid debt service.  Without the bank willingness to restructure debt, the properties may revert to the lender who has no business running them in the first place.  This condition may continue to spiral downward until the overall market devalues; pricing readjusts and the market begins to recover.  In the midst of a recession, a landlord who believes that a sustained recovery is around the corner will hold the bridge longer until his asset makes it over to the other side.   A double dip recession may cause a commercial office owner to reposition for growth too early, or give up on the market and let the building go fallow.   Double dipping is a feint from the marketplace from which commercial real estate owners may not recover.

Ten ways to protect your assets from the ravages of a double dip:

  1. Never over-leverage your portfolio – Match fixed income to fixed costs to sustain a healthy projected NOI.
  2. Stagger your lease terms to ensure that you will have adequate cash flow coverage to sustain your debt service no matter when a recession may occur, or how long it may last.
  3. Diversify your portfolio (commercial, residential, retail, hospitality, etc) to ensure that you have a mix of long-term and short term leases and lease types that help you take advantage of a bull market and protect yourself when the bear arrives.
  4. Perform necessary capital improvements when the cotton is high, with a strong emphasis on the word “necessary”.
  5. Put proven systems in place that help you to expand services to your tenants when the economy is strong and easily contract costs (particularly FTEs) when cash flows contract.
  6. Do not ignore normal preventive measures (maintenance, risk reduction, etc) in a down market – unexpected expenses will hobble your ability to survive.
  7. Wait for a recovery to mature before acting like you are in one – don’t build your bridge too short or pop the champagne too early.
  8. Know your tenants’ businesses; track their markets like you track your own.
  9. Hedge your occupancy rate with a diversified set of tenant industries – “every retail mall needs a good pawn broker.”
  10. Know your banker like you know your mother-in-law.  Hmmm?