Every bull market must end eventually — but whether that happens next year or next week is anyone’s guess.
If it was certain that the recession wouldn’t come until late in 2020, long positions in high-risk stocks would be the obvious choice. But without that certainty, a smart pick is REITs. REITs, which significantly outperform stocks during recessions, offer all the advantages with none of the drawbacks of traditional real estate investments.
Real estate is protected from volatility by factors like location, scarcity, and plot size. But unlike tangible property, which is expensive to buy and tough to sell, REITs can be traded on many investing apps. Because they come in single shares, even low-budget investors can diversify their REIT holdings.
What REITs make up a recession-protected portfolio? Mix and match from these three categories:
- Residential REITs
Regardless of the economy’s condition, housing is a need. Every major city is full of apartment complexes that can house anywhere from ten to 200 or more tenants. High occupancy volumes work in your favor because they reduce risk and increase upside potential.
Favor REITs in high-density areas. Urban centers won’t suddenly stop being desirable places to live. And because jobs tend to be clustered in metro areas, renters who live there may be less likely to default on their contracts than their peers in suburban or rural areas.
Aim for a mix of domestic and global REITs. Housing markets are notoriously local. Even if the entire U.S. housing market crashes a la 2008, property values and occupancy rates may be largely unaffected in other countries.
- Office REITs
Office REITs make the perfect complement to residential REITs. The good majority of companies rent the office space they use. Even if those companies need to lay off a couple of employees, they still need space to operate.
The most reliable sub-category of office REITs in a recession is net-lease REITs. “Net lease” describes the rental structure, in which the tenant covers all costs associated with property management, including the insurance, maintenance, and taxes.
Think about what that means. Net-lease REITs are investments primarily in retail companies that use standalone buildings. Fast-food restaurants, big-box stores, grocery stores, and home-improvement retailers all tend to weather recessions just fine.
- Healthcare REITs
There’s at least one more type of REIT that stays strong during recessions: healthcare REITs. People get sick no matter the economic conditions, and they tend to prioritize healthcare over other costs.There are many sub-types of healthcare REITs to choose from. Opt for those that hold properties in high-density cities where the average age of residents is higher.
Ideally, invest in those that hold hospitals, which derive a lot of revenue from government reimbursement and offer emergency care. Programs like Medicare can be trusted to pay, and consumers don’t consult their wallets in the event of a healthcare emergency. Because specialists are fewer and further between, they also keep hospitals afloat during downturns.
Although there’s no such thing as a recession-proof investment, REITs come close. Real estate is in high demand, and tenants are bound by a contractual commitment. Those are powerful forces, especially when other markets are weak.