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Various Impacts of Recession on the Commercial Real Estate

Investing in the commercial real estate is fraught with inherent risks and it is essential to understand the functioning of this sector. However, one of the most significant challenges to the commercial real estate is posed by the recession. During the recession, the economy goes through a turmoil and it also affects the real estate business. Go through the slide to know the impact of a recession on the commercial real estate sector.

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Various Impacts of Recession on the Commercial Real Estate

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  1. Various Impacts of Recession on the Commercial Real Estate

  2. The commercial real estate market, mainly encompasses apartment complexes, hotels, industrial parks, malls, office buildings and many other properties are used for business purposes.

  3. It is a cyclical industry whose fate is closely tied to the rise and fall of the economy.

  4. In good times, property owners enjoy a huge demand for office space and a steady stream of rental income.

  5. Consumers also tend to spend more boosting demand for retail space and when economic conditions are tough, businesses scale back on office space.

  6. This means skyrocketing vacancy rates and decreasing rents for property owners and those with retail space also suffer as consumers tighten their purse strings and shy away from purchases.

  7. There are various impacts on the commercial real estate and it confronts a number of challenges that inevitably amplify the risks faced by property owners.

  8. Soaring of vacancy rate

  9. The vacancy rate serves as an important indicator of the health of a real estate market.

  10. Vacant properties pose a greater number of hazards than occupied buildings and one reason can be abandoned buildings are more prone to fire, water leakage and wind damage.

  11. The real estate investors have to deal with increased exposure to losses caused by physical damage to the vacant property.

  12. Also, the owners have to face potential liability exposures from people who may have been injured on the property.

  13. Rise in defaulters

  14. Due to the decrease in rents, many property developers start to default on loans, causing real estate wars between developers and lenders.

  15. When developers fail to pay their loans, they run the risk of facing foreclosures from lenders and also get hit by the insurance coverage implications.

  16. The risk of damage to unoccupied commercial property as well as potentially expensive losses also goes up as foreclosures create more empty spaces.

  17. During the transition period when property ownership becomes murky, insurance coverage issues may also spark problems as parties pass the blame to escape liability.

  18. Directors get blamed

  19. The financial meltdown coupled with heightened scrutiny from shareholders also takes a toll on directors and officers in many industries as they see a wave of litigation.

  20. In the market, there is a sharp drop in property values amid the crisis, leaving property owners struggling as values slid to levels lower than those of their mortgages.

  21. This results in lawsuits from disgruntled buyers who accuse developers either of breaching their contract or not delivering on promises.

  22. Such litigation brings down the image of the real estate firms and also adds a lot of pressure on the marketing agents for new sales.

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