Recession-Resistant Real Estate Opportunities
For the past several months almost every news report has talked about the global COVID-19 pandemic. To date, COVID-19 has infected over 7 million people worldwide and over 2 million in the United States. The death toll for this novel coronavirus is over 400,000 globally and over 113,000 in the U.S.
To deter the spread of the disease, the U.S. voluntarily shut down its economy and ordered over 325 million people to “stay-at-home.” The coronavirus pandemic has had a devastating effect on the U.S. economy. The National Bureau of Economic Research (NBER) reported on June 8, 2020 that the economy fell into recession in February 2020, ending 128 months of growth - the longest growth period since 1854. A recession is typically defined as two consecutive quarters or more of falling Gross Domestic Product (GDP).
Many expected the unemployment rate to climb to 20% but fortunately the U.S. added 2.5 million jobs which cut the rate from 15% to 13%. Now the question becomes, will the economy turnaround fast enough to avoid a recession and, as real estate investors look to the future, what can you do to bolster your portfolio to make it recession-resistant?
The industries that have performed best in times of economic uncertainty have been companies that manufacture and sell consumer staples and those businesses that provide essential services. Grocery stores and discount retail stores sell consumer staples such as food, toothpaste, soap, shampoo, laundry detergent, dish soap, toilet paper, paper towels and many other similar products. They tend to perform well when there is a downturn in the economy.
Also, essential businesses and services like gas stations, financial institutions, hardware stores, mail delivery, laundry services, transportation, construction, manufacturing, and real estate are all considered essential businesses. Home-based and residential care facilities along with day care centers and funeral services are also deemed essential. Other essential services fall into these categories: healthcare and public health operations, human services operations, essential infrastructure operations and essential government functions. To create a recession-resistant real estate portfolio, focus on real estate opportunities that cater to these industries.
When there is a downturn in the economy, look for National Credit Tenants who lease their space rather than own their space. Discount retailers and grocery stores like Wal-Mart, Costco, Krogers, Target and others are generally good investments. On a smaller scale, companies like Dollar Tree/Family Dollar, Dollar General, Walgreens, CVS and other discount retailers like Home Depot, Lowe’s, AutoZone, O’Reilly Auto Parts, etc. make great real estate investment opportunities in a recessionary environment.
Other recession-resistant real estate opportunities include apartments, self-storage facilities, construction and manufacturing facilities. These property types tend to do well when the economy is growing and often do even better when the economy is sluggish. These investments may not be as sexy as hotels, restaurants or entertainment facilities, but they do tend to outperform the more glamorous property types in times of economic uncertainty. If you want to create a recession-resistant real estate investment portfolio focus on properties that are leased to companies that offer consumer staples and essential products and services.
ABOUT THE AUTHOR
Ken has been in the real estate business for over 40 years and has personally overseen the development and management of over $350 million worth of assets. Ken holds a B.S. degree in Accounting from Brigham Young University, a MBA from the University of Utah. Licensed real estate broker since 1976. He holds the following designations: CCIM, CPM, CRS,CCA. Served as the president of the Utah Apartment Association.