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 0.98%), 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 …….