Real estate is one sector that tends to fare better than most during recessions, but there are a variety of sub-sectors that can be impacted in different ways. For example, real estate investment trusts (REITs), which own hotels, tend not to do well during recessions as consumers spend less money on travel.
On the other hand, there are several types of commercial real estate that are extremely resilient and should perform well even in a tough economy. Against this background, we present three first-class REITs that can be excellent additions to your portfolio even during a recession.
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1. Realty Income: Built for any type of economy
I have called real estate income (O 1.25%) may be the best overall dividend stock on the market, and I stand by that statement. In case you don’t know, Realty Income has grown from a single fast food restaurant building in 1969 to a portfolio of more than 11,000 rental properties across the US and Europe. The REIT has paid 622 consecutive monthly dividends to investors, increased its payouts for 98 consecutive quarters, and has delivered a 15.3% annualized total return for investors since its listing on the NYSE in 1994.
It might seem strange that Realty Income does so well during recessions, given that most of its tenants are retail businesses. But most properties are occupied by businesses that are recession-resistant: think grocery stores, convenience stores, pharmacies, and dollar stores, to name a few. Realty Income has a 4.4% dividend yield that it pays in monthly installments, and that income stream should continue to grow in the years to come.
2. Healthpeak Traits: Extremely resilient traits and excellent yields
It’s hard to argue that any type of commercial real estate is any more recession-proof than healthcare. Put simply, healthcare tenants have long-term leases, and people need access to healthcare regardless of what the economy is doing.
Healthpeak properties (PEAK 0.48%) can be a particularly good buy in a recession. It invests in three types of healthcare real estate — life science facilities, physician offices, and senior communities with ongoing care. All three are recession-resistant and should continue to grow in demand for the foreseeable future as the massive baby boomer generation ages. With a yield of 4.1% and plenty of growth potential, this could be a great REIT to own in good times and bad.
3. Digital Realty: Not even a recession can derail this trend
Think how many internet-connected devices were in your home just a decade ago. How many are there now? Within 15 feet of my seat, I can see a vacuum cleaner, printer, doorbell camera, speaker, and security system all connected together. And that’s not even counting my computer and smartphone.
The point is, the volume and complexity of data flowing around the world is growing rapidly, and even in a recession, that’s unlikely to change. And all that data needs a place to live, and that’s where data centers come in. digital real estate (DLR 2.69%) is one of the largest data center owners and operators in the world, and its customers include some of the biggest names in technology.
Sure, Digital Realty’s business could slow during recessions as tech companies curb new spending, but the long-term trend is intact. With a dividend yield of nearly 4% and a stock price nearly 30% off its peak, Digital Realty is a great REIT to consider if you’re worried about a recession.
These shops should be fine, but…
As a final thought, it’s important to note that I’m saying these companies should do well in a recession. Share prices, on the other hand, could well collapse. And of course, that’s exactly what I’d expect if inflation gets any worse or if interest rates go higher than the market is expecting.
But that’s what makes these REITs good buys during a recession. Buying companies that continue to increase their profitability year after year at a discount can be an excellent way to create long-term wealth. In fact, when the COVID-19 pandemic first hit and the economy went into recession, I bought shares in all three — and if another recession hits, I’ll likely add more.