There's a reason stocks have been so shaky over the past number of weeks. Not only have inflation levels soared beyond economists' expectations, but now, the Federal Reserve is moving forward with planned rate hikes in an effort to slow inflation down.
That's a necessary thing. But it could also fuel a recession.
As the cost of borrowing increases, consumers are apt to start cutting back on spending. The good news is that once they do, the cost of everyday expenses is apt to decrease. The bad news is that as consumers start spending less and businesses take in less revenue, widespread layoffs could ensue, stores could start shuttering, and retail investors could land in the very uncomfortable position of wondering just how bad their losses are going to be.
If you own retail REITs in your portfolio, you may be worried about an upcoming recession. But here's one reason to keep the faith.
Retail REITs have overcome worse
The U.S. economy has seen its share of downturns. But perhaps one of the most extreme situations it ever faced was the COVID-related shutdown that took place in early 2020.
When the pandemic first hit U.S. soil, non-essential businesses were told they had to shut down or limit themselves to pickup and delivery. That may have worked for pizza joints. But for many retailers, not so much. In fact, 2020 saw a record number of retail bankruptcies and store closures. And many retail REITs saw their value sink.
But the strongest retail REITs were ultimately able to survive those COVID-related shutdowns and thrive in their wake. And if they were able to do that, then there's no reason to believe they can't make it through a recession.
Now to be clear, some retail REITs are better poised to survive a recession than others. Take Simon Property Group (SPG -0.06%), which maintains an extensive portfolio of Class A shopping center properties.
In March of 2020, its share price fell to roughly $48 when the stock market tanked and non-essential retailers were forced to shutter. But by March of 2021, shares were back to trading at well over $100 apiece. And in late 2021, shares peaked at roughly $170 apiece.
Granted, right now, shares of Simon Property Group are down, but so is the stock market on a whole. And Simon has long proven itself to be good at adapting to adverse conditions and events. Just look at the fact that it's taken on a side business of sorts that involves buying struggling retailers out of bankruptcy. Rather than resign itself to vacancies galore, the retail giant took a gamble -- one that's since paid off.
Of course, Simon is just one example of a retail REIT that's managed to thrive in the wake of the pandemic. The point, however, is that investors shouldn't start panicking about the impact of a potential recession just yet. If retail REITs were able to survive an extreme situation like the COVID-19 shutdowns, there's no reason to think they won't emerge victorious in the wake of what could end up being a fairly short-lived period of economic decline.
