As unfavored as recessions are, they are a part of the economic cycle, and right now there are some factors indicating that a potential recession is looming. Savvy investors are taking the time right now to stock up on recession-resilient assets, including real estate investments that can help combat rising inflation, diversify their portfolio, and hopefully ride out the storm when it comes. If you're on the hunt to recession-proof your investment portfolio, here's why you should consider investing in these three real estate industries.
Self-storage is arguably the best real estate industry to be invested in during a recession. Self-storage at its core is in the business of distress. Circumstances like divorce, relocation, death, unemployment, or downsizing are some of the common drivers for people to store their things in a self-storage facility. Most of these are common outcomes regardless of a recession or not.
During the Great Recession from 2008 to 2012, the four major publicly traded self-storage REITs at the time -- CubeSmart, Public Storage (PSA 0.48%), Extra Space Storage, and Life Storage -- saw a very short-lived drop in share price in 2008 before skyrocketing the following three years due to demand. These four REITs obliterated the annualized return of the S&P 500 during that same period.
But self-storage doesn't need a recession to do well. In fact, it's been the top-performing sector among all REIT industries for the past 27 years. No REIT in this sector is a bad buy; however, Public Storage, the largest of all self-storage REITs, stands out as an appealing buy right now. The company notably expanded its portfolio in 2021, spending $5.1 billion to add 232 facilities to its portfolio. Its expansion is continuing in 2022, with $833.8 million being spent across multiple new developments.
The major benefit here is that the company has very little debt. Public Storage boasts an incredibly low debt ratio of 0.2 times its earnings before taxes, interest, depreciation, and amortization (EBITDA), something that is virtually unheard of in a REIT of this size. With preferred equity, its debt ratios jump up to four times its EBITDA, much more in line with REIT averages, but it's still in an incredibly strong financial position that would help if a recession is coming.
Data centers and communications
Salary cuts and job losses, among other economic impacts of a recession, often prompt people to curtail their spending when times are hard. This means 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 technological demand.
American Tower (AMT 1.46%) is one of my favorite REITs when it comes to recession resilience because it offers 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 U.S. by market capitalization, with 221,000 communications sites across the globe. Simply put, it's massive.
Communications infrastructure is its main bread and butter, with things like the adoption of 5G and its expansion into new markets helping drive its steady growth. But it's also expanded into the data center space in 2021, acquiring CoreSite data center REIT. Today, around 7% of its revenues comes from data centers, which is small in the scheme of things, but I see this number continuing to grow as the company further expands its presence in this space. Share prices are down 21% year to date, making it a great opportunity to snag shares in this high-quality company at a discount.
Industrial real estate
Of the three industries discussed here, industrial real estate is the most vulnerable to the impacts of a recession. Retail spending, including e-commerce, usually wains in a recession. This puts industrial real estate's primary tenant base in a tough spot. However, there are several factors that favor industrial real estate if a recession were to happen today. Supply chain challenges, increased shipping costs, and global shortages have created a big push for the manufacturing of products to return stateside -- something I only see growing in the event of a recession.
Prologis (PLD 0.83%), the largest industrial REIT and one of the largest REITs by market cap, is one of the strongest plays in this sector. Its global portfolio, low debt ratios hovering at 3.9 times its EBITDA, and $6.7 billion purchasing power puts it in a solid position to ride out potential turbulence.
Despite the first quarter of 2022 showing a dip in demand and rental growth when compared to recent quarters, Prologis seems confident about its future, making two major offers; one to acquire a European industrial company managed by Blackstone Group and more recently the offer to acquire the slightly smaller industrial REIT, Duke Realty Corp. The acquisition, while still a ways off from being concrete, would give the company a big boost in its global market presence.
No one knows if and when a recession will come. Rather than fearing what will unfold, I am preparing my portfolio to perform admirably whichever way things go. All three of these companies are in strong industries backed by long-term demand, making them solid buys now and well into the future.