AEven though recessions are unfavorable, they are part of the economic cycle and, at present, there are certain factors indicating that a potential recession is looming. Savvy investors are currently taking the time to stock up on recession-proof assets, including real estate investments that can help fight rising inflation, diversify their portfolio and hopefully weather the storm. when she shows up. If you’re looking to protect your investment portfolio against the recession, here’s why you should consider investing in these three real estate sectors.
Self-storage is arguably the best real estate sector to invest in during a recession. Self-storage is essentially in the realm of distress. Circumstances such as divorce, moving, death, unemployment, or downsizing are some of the most common factors that lead people to store their belongings in a self-storage facility. Most of them are common results regardless of a recession or not.
During the Great Recession from 2008 to 2012, the top four publicly traded self-storage REITs at the time — CubeSmart, public storage (NYSE:PSA), Extra space Storageand Life storage – experienced a very short decline in share price in 2008 before soaring in the following three years due to demand. These four REITs wiped out the annualized return of the S&P500 during this same period.
But self-storage doesn’t need a recession to do well. In fact, it has been the best performing sector among all REIT industries for 27 years. No REIT in this sector is a bad buy; however, Public Storage, the largest of all self-storage REITs, currently stands out as an attractive buy. The company notably expanded its portfolio in 2021, spending $5.1 billion to add 232 facilities to its portfolio. Its expansion continues in 2022, with $833.8 million spent on several new developments.
The main advantage here is that the company has very little debt. Public Storage has an incredibly low debt-to-equity ratio of 0.2 times earnings before tax, interest, depreciation and amortization (EBITDA), which is virtually unheard of in a REIT of this size. With preferred shares, its debt ratios climb to four times its EBITDA, which is much more in line with REIT averages, but it is still in an incredibly strong financial position which would help if a recession comes.
Data centers and communications
Wage cuts and job losses, among other economic impacts of a recession, often prompt people to cut spending when times are tough. This means that less time and money is spent on extracurricular activities like dining out, going to the movies, or traveling, and instead more time is spent indoors doing more affordable or free activities. One thing that doesn’t fade is technology demand.
American Tower (NYSE: AMT) is one of my favorite recession-proof REITs because it provides exposure to both the communications and data center industries, which help store and aggregate data and connect people in our technological world. American Tower is the largest REIT in the United States by market capitalization, with 221,000 communications sites worldwide. In other words, it’s huge.
Communications infrastructure is its main bread and butter, with things like 5G adoption and expansion into new markets contributing to its steady growth. But it also expanded into the data center space in 2021, acquiring CoreSite Data Center REIT. Today, about 7% of its revenue comes from data centers, which is small in the order of things, but I see that number continuing to grow as the company expands its presence in this space. The stock price is down 21% year-to-date, making this a great opportunity to buy shares of this high-quality company at a discount.
Industrial real estate
Of the three industries examined here, industrial real estate is the most vulnerable to the impacts of a recession. Retail spending, including e-commerce, typically declines during recessions. This puts the main tenant base of industrial real estate in a difficult situation. However, several factors favor industrial real estate should a recession occur today. Supply chain challenges, rising shipping costs, and global shortages have created a strong push for product manufacturing to return to the United States — something I only see growing in the event of a recession.
Prologis (NYSE: PLD), the largest industrial REIT and one of the largest REITs by market capitalization, is one of the strongest players in this sector. Its global portfolio, low debt ratios hovering at 3.9x EBITDA and purchasing power of $6.7 billion put it in a strong position to weather potential headwinds.
Despite the first quarter of 2022 showing a drop in demand and rental growth compared to the last quarters, Prologis seems confident in his future, making two major offers; that of acquiring a European industrial company headed by Blackstone Group and more recently the offer to acquire the somewhat smaller industrial REIT, Duke Realty Corp. The acquisition, although still far from concrete, would give the company a big boost in its presence in the global market.
No one knows if and when a recession will come. Rather than fearing what will happen, I prepare my wallet to perform admirably no matter what happens. All three of these companies are from strong sectors backed by long-term demand, making them solid buys now and in the future.
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Liz Brumer Smith holds positions at American Tower, Duke Realty, Extra Space Storage and Prologis. The Motley Fool has posts and recommends American Tower, Prologis and The Blackstone Group Inc. The Motley Fool recommends Life Storage Inc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.