This has been a crazy year for our economy. Rapidly rising interest rates, spiraling inflation and stock market volatility are worrying investors. Until recently, the real estate market remained somewhat spared, reaching highs despite the uncertainty.
But now that stocks are rising, prices are falling (albeit slightly) and fewer deals are taking place, it’s understandable that investors are starting to worry about a possible real estate crash.
No one can really tell if a crash is imminent, but there are ways to prepare for and hopefully protect your portfolio against a sudden or dramatic loss in real estate values. Real estate investment trusts (REITs), in particular, can offer investors cover during a declining real estate market with attractive dividends on top.
If You’re Worried About A Real Estate Crash, Here’s Why Extra space storage (EXR -0.27%), Central American apartment communities (MAA -2.06%) and Alexandria Real Estate Stocks (ARE -0.88%) are positioned to withstand a crash.
Liz Brumer-Smith (additional storage space): Extra Space Storage is the second largest self-storage operator in the industry. At the start of 2022, the REIT wholly and partly owned and operated 2,130 self-storage facilities while being the largest third-party management company in the industry.
Self-storage is a naturally resilient business model. People store things for various reasons, but difficulties such as downsizing, death, divorce, or relocation are some of the main drivers of its business. Downsizing and relocation, in particular, have been known to increase in declining housing markets, which could help keep business steady for the company despite falling real estate values.
And the company has an incredible track record of adding value for its shareholders. It is the best performing self-storage REIT of the past five years and has produced an annualized return of 22% over the past 10 years, 9% more than the S&P500.
Its occupancy rate is high at 94.5% and its net rent per square foot posted a record 23.6% year-over-year increase in the first quarter of 2022. Its financial position is incredibly strong with a debt-to-earnings before interest, tax, depreciation and amortization (EBITDA) ratio of 4.3 times, which is below the average for REITs. And it pays an attractive dividend yield of 3.24%.
Market volatility has pushed its stock price up a bit, but don’t let investors’ short-term worries overshadow its resilience in a real estate crash.
When people can’t buy houses, they rent apartments
Mike Price (America Central Apartment Communities): I am not convinced that the housing market will collapse. Housing inventory is still low and many buyers are able to move up and down while purchasing a new home. That said, Mid-America, which recently rebranded itself as MAA, could offer you the best of both worlds: protection in the event of a housing crisis and an upside if the market recovers quickly.
Let’s start with protection against the housing crisis. MAA is a residential REIT. It owns and rents multi-family apartments; Currently, it has more than 100,000 units in total. Multifamily real estate typically benefits from downward pressure in the housing market as some people eventually decide to give up and simply rent until the market cools or they can qualify for a mortgage important enough.
Management says it goes above and beyond to “create value throughout the market cycle.” The REIT is focused on the Sunbelt, which is currently experiencing high demand as people flee major Tier 1 coastal cities. It is diversifying units by price and geography within the Sunbelt to reach as many people as possible. . The same different price tiers work in apartments: when prices go up and people can’t afford to be in a specific tier, they can move to the next tier.
This strategy has paid off for MAA. It hasn’t missed or even reduced its dividend payout since 1994. The 10-year total shareholder return is 14.4% per year, and the 20-year return is even higher at 15.5% per year. year.
What if the market recovers? MAA has plenty of room for growth. It has a $1 billion 2022 pipeline of new properties. It is working on redesigning over 13,000 units and adding smart home technology to some units to add another layer of pricing power. In total, management projects have integrated average rent increases of 17.1% in 2022.
Look to supporting players in biotechnology and life sciences
Kristi Waterworth (Alexandria Real Estate Stocks): For investors concerned about how the decline in the housing market might affect their portfolios, there are plenty of options. You can choose to diversify into manufacturing or utilities, but for my money, it’s life science REITs. Unlike many REITs that focus primarily on offices or housing, REITs like Alexandria Real Estate Equities are thinking about the new technologies of tomorrow.
Because of this, the REIT’s income has steadily increased, as have its dividend payouts. Over the past 10 years, dividends have increased by 140.86%, from $1.86 in 2011 to $4.48 in 2021.
Rather than risking capital on potentially random new pharmaceutical developments, Alexandria offers companies that need these types of spaces large, collaborative campuses in which to develop new products. Its “cluster model,” which groups related businesses on connected (or neighboring) campuses, is an interesting approach that is sure to catch the eye of its tenants.
At the end of 2021, the company had a strong 94% occupancy rate among its properties. 91% of his properties were triple net leases, which obligate the tenant to pay all property-related expenses, including taxes, insurance and maintenance. This further improves the owner’s bottom line. In addition, investment grade or large capitalization companies represent 51% of the REIT’s total annual rental income. Only 8% to 11% of leases will expire each year, ensuring a steady stream of income, as well as built-in rent increases.
The need for more specialized spaces for life science companies is only growing. On average, total U.S. employment for this sector has grown 6.6% per year since 2011. And with an aging population and an ongoing pandemic, that need doesn’t seem to be slowing anytime soon.