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These 3 REITs Were Built To Survive a Recession


Jul 10, 2020 by Matt Frankel, CFP

Stocks are relatively risky investments by nature, but they aren't all in the same boat. While some types of real estate stocks -- like hotel operators, for example -- are rather sensitive to recessions and tough economic conditions, others are not.

With that in mind, here's a look at what makes certain real estate investment trusts (REITs) and other real estate stocks less susceptible to recessions than others as well as three examples of excellent REITs that should be just fine no matter what the economy or stock market are doing.

What makes a real estate stock recession-resistant?

There's no set formula that makes a stock recession-resistant. And it's also worth noting before we go any further that every recession is different, with unique causes, economic impacts, and other factors. For example, the recession caused by the COVID-19 pandemic is affecting the economy and the stock market far differently than the Great Recession of 2007-2009.

That said, there are some common characteristics to look for in REITs and other real estate stocks that can help you find companies that should survive recessions relatively unscathed.

Cyclicality

This is typically the number one determinant of whether a REIT (or any other stock, for that matter) is recession-prone. In simple terms, cyclicality refers to how economically sensitive a business is. Healthcare real estate would be an example of a non-cyclical property, as people need to utilize healthcare services no matter what the economy is doing. On the other hand, hotel real estate is very cyclical, as travel demand tends to plummet during recessions.

Lease structure

Commercial real estate leases range in length from a day (hotels) to decades (retail, offices, and warehouses, for example). A longer lease structure can help offset cyclicality to some degree -- for example, retail is a cyclical business, but if a REIT's retail tenants are locked into 15-year leases, it helps stabilize the income even in tough times.

Low debt

Generally speaking, I like to look for REITs whose debt loads make up less than half of their total capital structure. In other words, if a REIT's equity market cap is $1 billion, its debt load should be $1 billion or less. Lower is better, and a manageable debt load can provide financial flexibility and a much-needed cushion during tough times.

Don't confuse recession-resistant with recession-proof

One important thing for every investor to know is that there's no such thing as a bulletproof stock. While businesses that meet the criteria discussed in the previous section tend to hold up better during recessions and turbulent times than businesses that don't, it's important to emphasize that no business is completely recession-proof.

Even the least cyclical businesses are somewhat vulnerable to things like spiking unemployment, high inflation, and poor economic growth. And things like low debt and long lease lengths can certainly help to cushion the blow of a deep recession but likely won't eliminate the effects entirely.

In a nutshell, keep in mind that while this discussion is about recession-resistant stocks, it's important to remember that they are stocks and by nature carry a certain level of risk.

Three recession-resistant real estate stocks

With the criteria discussed earlier in mind, here are three great examples of recession-resistant real estate investment trusts, or REITs, that you may want to put on your radar, followed by a bit about why each one should hold up well no matter what the economy is doing.

Company (Symbol) Type of Real Estate Recent Price Dividend Yield
Realty Income (NYSE: O) Net-lease retail $58.53 4.8%
Physicians Realty Trust (NYSE: DOC) Medical offices $16.80 5.5%
Prologis (NYSE: PLD) Logistics $95.76 2.4%

Data source: CNBC. Prices and dividend yields as of market close on 7/8/2020.

The right kind of retail

It may sound odd to start with a retail REIT in a discussion about surviving recessions, but hear me out. Realty Income is not facing the same issues from e-commerce disruption that most mall and shopping center REITs are facing. In fact, the company is as built for worry-free income and growth as pretty much any other REIT in the market.

Realty Income owns about 6,500 properties in the U.S. and U.K., most of which are occupied by retail tenants. However, there are two key points for investors to know:

  • Most tenants operate in businesses that do well in recessions. Grocery stores, dollar stores, drug stores, and convenience stores are some examples. And these are businesses that aren't easily disrupted by e-commerce competitors. Plus, for the purposes of the COVID-19 pandemic, most of Realty Income's properties are occupied by essential businesses.
  • Realty Income's tenants sign long-term net leases. This is a type of lease structure that requires tenants to pay property taxes, insurance, and maintenance costs, thereby removing the variable expenses of property ownership. And these leases come with long initial terms (typically 15 years or more) with annual rent increases built right in.

In a nutshell, all Realty Income has to do is put a tenant in place and enjoy decades of predictable income. That's why Realty Income hasn't missed a monthly dividend payment in 50 years, and why the company has been able to increase its payout for the past 91 quarters in a row, no matter what the economy was doing.

Strong demographic trends and an essential service

Physicians Realty Trust is a healthcare REIT that focuses on medical office properties. The company owns almost 270 properties, most of which are affiliated with major health systems.

Healthcare real estate is perhaps the least cyclical type of commercial property. Not only are lease lengths typically on the longer end of the spectrum but healthcare services are just as much in demand in tough times as they are in strong economies.

Not surprisingly, Physicians Realty Trust has held up just fine during the COVID-19 pandemic. The company has collected 98% and 97% of April and May rent, respectively, and virtually all of its properties were open for the duration of the lockdowns (although some of its tenant practices may have closed temporarily).

In addition, the medical office focus should be an asset in recessions. Senior housing properties (which many major healthcare REITs own) are facing oversupply headwinds and have been very hard-hit by the pandemic. Medical offices, on the other hand, benefit from the same future demand growth that comes with the aging U.S. population and should also benefit as more healthcare procedures are able to be performed on an outpatient basis over time.

Logistics real estate is becoming more important over time

Prologis is the largest industrial REIT in the market and is one of the largest real estate companies of any kind in the world. The company describes itself as the global leader in "logistics" real estate, which includes properties like warehouses and fulfilment centers. At the end of the first quarter of 2020, Prologis owned 4,660 logistics facilities located in 19 countries, with nearly one billion square feet of space.

For starters, logistics real estate is needed in good economies and bad. Items still need to get from point A to point B. Tenants typically sign long-term leases, and industrial real estate has generally lower operational costs than many other commercial property types. And speaking of tenants, Prologis' properties are leased to companies like Amazon (NASDAQ: AMZN), FedEx (NYSE: FDX), Home Depot (NYSE: HD), UPS (NYSE: UPS), and Walmart (NYSE: WMT), just to name a few.

Plus, logistics real estate is an essential component of e-commerce growth. E-commerce currently makes up about 11.5% of all U.S. retail sales, according to the Census Bureau, and this has risen steadily from just 4% a decade ago. E-commerce retail requires three times the logistics real estate of brick-and-mortar retail, so this trend should help keep demand growing, even in a recession.

These REITs are recession-resistant, but their stocks aren't immune to fluctuations

As a final note, it's important to mention that we're talking about businesses that will hold up well during recessions, which doesn't necessarily mean their stock prices will. In fact, when market crashes happen, many stocks end up in free-fall, regardless of whether their underlying business is doing well. In fact, Prologis plunged by 40% from its February 2020 high as the coronavirus outbreak worsened, and the other two saw similar moves. However, the fact that their businesses are holding up just fine has led to a pretty sharp rebound in the months since.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matthew Frankel, CFP owns shares of FedEx and Realty Income. The Motley Fool owns shares of and recommends Amazon, FedEx, Home Depot, and Physicians Realty Trust and recommends the following options: long January 2022 $1920 calls on Amazon, long January 2021 $120 calls on Home Depot, short January 2021 $210 calls on Home Depot, and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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