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Maintenance in a tightening economy: the impact of recession and interest rates
April 23, 2023
The threat of a potential recession has the potential to upend business as usual, but to this point, nobody is exactly sure when—or if—a recession will happen, and if it does, what it will exactly look like. However, interest rates look to remain high, inflation might be sticky, and labor costs continue to be challenging. One thing is clear for facilities managers: better to prepare now for whatever comes later this year.
The post-pandemic U.S. economy has been battered with high inflation and supply chain and labor shortages. For facilities managers with distributed portfolios, this has presented a host of challenges from sourcing labor to managing lead times to constantly repositioning budgets. However, they are now staring down another challenge: the potential for a recession. As a result, facilities may not be maintained as well as they would be during times of economic growth.
The potential cause of this recession—rising interest rates—is also hamstringing facilities managers by raising operating costs and making borrowing for capital repairs more expensive. Faced with potential budget shortfalls and higher borrowing costs, facilities managers will need to develop short- and long-term strategies to deal with these headwinds to ensure their facilities remain in top operating shape and are best positioned for a recession exit.
In this industry update, we’ll look at how both areas are having an impact on facilities maintenance strategies for distributed portfolios and what managers and operators can do now to position themselves for success when the economy rebounds.
A recession can have a significant impact on facilities or operations managers. During an economic downturn, businesses may face financial challenges, such as reduced revenue, tighter budgets, and cost-cutting measures, which can directly affect facility maintenance efforts. This could force managers to do the same with less while still meeting additional operational goals and benchmarks. There are three main ways a recession can disrupt maintenance at commercial facilities:
Budget cuts: In an effort to reduce costs, businesses may implement budget cuts across various departments, including facility maintenance. Maintenance budgets may be reduced, leading to deferred or delayed maintenance tasks. This can result in neglected repairs, maintenance backlogs, and decreased preventive maintenance activities, which can lead to further deterioration of facility assets, increased breakdowns, and potentially higher repair or replacement costs in the long run.
Reduced staffing levels: During a recession, businesses may also reduce staffing levels to cope with financial challenges. Facilities and real estate teams that are usually responsible for facilities maintenance may face downsizing, reduced work hours, or hiring freezes, resulting in limited resources and personnel to effectively address maintenance needs. This can result in longer response times for maintenance requests, increased workload for remaining staff, and potential gaps in preventive maintenance schedules, which can impact the overall performance and lifespan of facility assets. Additionally, store staff might be reduced, which could impact daily cleaning tasks.
Deferred capital projects: In a recession, businesses may postpone or cancel capital projects, such as renovations, upgrades, or replacements, to conserve funds. For facilities and location managers, this can result in outdated or inefficient facility systems, equipment, or infrastructure that may require more frequent maintenance or repairs. Additionally, deferred capital projects can negatively impact the aesthetics, functionality, and safety of commercial facilities, potentially affecting tenant satisfaction, customer perception, and overall facility performance. This can potentially have the most long-term impact as the backlog of capital projects will be more difficult to address and lead to a slow deterioration of a location.
Regardless of the impact or duration of a potential recession, higher interest rates are expected to stick around and potentially have a greater impact on facilities maintenance over the long term. Higher interest rates can lead to reduced spending on maintenance, decreased cash flow for repairs and upgrades, and delayed or postponed maintenance activities.
Higher borrowing costs. Even when budgets rebound, increased interest rates can result in higher borrowing costs for businesses, making it more expensive for them to finance capital expenditures such as facility upgrades, repairs, and maintenance projects. This can mostly impact large-scale asset purchases and capital expenditures. This could result in facilities having to extend useable lifespans of existing equipment or defer needed branding upgrades. As a result, facilities may experience increased wear and tear, reduced performance, and potential safety risks, leading to higher long-term costs and decreased operational efficiency.
Company financial health. Higher interest rates can impact the overall financial health of businesses, affecting their ability to allocate funds for facility maintenance. Businesses may face increased debt servicing costs, reducing their cash flow and available capital for routine maintenance, repairs, and upgrades. This can result in a lack of funds for necessary repairs and upgrades, leading to delayed or neglected maintenance activities. Over time, this can lead to a decline in the condition and functionality of commercial facilities, negatively impacting their long-term performance and value.
Shifting priorities. Higher interest rates can impact the decision-making process for facility owners and operators. With higher borrowing costs, businesses may prioritize other expenses over facility maintenance, especially if they are facing tighter budgets. They may delay or postpone maintenance projects, resulting in a backlog of issues that can become more costly and time-consuming to address in the future. Additionally, higher interest rates may also discourage businesses from taking on new facility improvement projects or expansion plans, further impacting the overall maintenance and management of commercial facilities.
It is important for businesses to carefully consider the impact of interest rates on their facility maintenance budgets and make strategic decisions to ensure the long-term health and functionality of their commercial facilities.
For savvy facilities and locations managers, there are ways to mitigate the short- and long-term effects of a recession and higher interest rates. In some cases, these can create excellent opportunities to rethink existing business models, budgets, and long-term strategies to better position facilities post-recession and to take advantage of the current economic climate.
Commercial facilities managers should look to outsourcing work to save costs or seek to prolong the lifespan of their equipment and facilities instead of investing in new ones. With the potential for reduced headcount and uncertain budgets, outsourcing to a third-party provider centralizes numerous maintenance operations and takes it out of the monthly facilities P&L. Doing this helps to ensure a wide vendor base, frees up store employees to focus on customer service, and utilizes tech platform and data analytics to make smarter business decisions. This can provide needed budget stability during an unstable period.
A recession can be challenging, but it can also present opportunities for companies to innovate and adjust to changing market conditions. Market conditions will eventually improve, and companies that use this time to maintain their assets and facilities will be better positioned to capture market share. For example, companies may shift their focus to preventive maintenance to extend the lifespan of existing equipment and reduce the need for costly repairs.
Companies may also invest in new technologies to improve efficiency and reduce costs. Adopting a proactive approach to operations by implementing new technologies or processes that reduce labor costs or streamline processes can improve efficiency, reduce costs, and improve profitability. Technology platforms can centralize numerous administrative functions while providing greater oversight and analytics. With tighter budgets and less money for capital improvements, understanding current asset performance through digital tracking can help to extend already stretched budgets.
Winning companies will look to these opportunities during a period of instability to better position themselves against competitors. By outsourcing facilities maintenance services and leveraging property technology solutions, such as computerized maintenance management systems (CMMS) and predictive analytics, commercial facilities can streamline their maintenance processes, optimize their resources, and reduce costs. These strategies enable proactive maintenance, allowing facilities to identify and address issues before they become costly problems, which helps minimize downtime and ensures optimal performance of assets. By embracing the opportunities, commercial facilities can not only survive a recession but also thrive in the long term by enhancing operational efficiency, improving tenant experience, and staying ahead of the competition.
