This has been a wild year for our economy. Rapidly rising interest rates, sky-high inflation, and stock market volatility have investors on edge. Until recently, the real estate market has remained somewhat unaffected, growing sky high despite the uncertainty.
But now that inventory is rising, prices are cooling (albeit only slightly), and fewer transactions are taking place, it’s understandable that investors are starting to worry about a potential housing crash.
No one can truly know if a crash is coming, but there are ways to prepare and hopefully protect your portfolio from a sudden or dramatic loss in real estate values. Real estate investment trusts (REITs) in particular can offer investors a hedge during a down real estate market with attractive dividends to boot.
If you’re worried about a housing crash, here’s why Extra Space Storage (EXR -0.27%), Mid-America Apartment Communities (MAA) -2.06%) and Alexandria Real Estate Equities (ARE -0.88%) are positioned to withstand a crash.
Safety in storage
Liz Brumer-Smith (Extra Space Storage): 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 also being the largest third-party management company in the business.
Self-storage is a naturally resilient business model. People store things for a variety of reasons, but hardships like downsizing, death, divorce, or relocation are some of the biggest drivers of its business. Downsizing and relocation, in particular, are known to increase in down housing markets, which could help maintain steady business for the company despite lower values in real estate.
And the company has an incredible track record of adding value for its shareholders. It’s been the top-performing self-storage REIT for the past five years and has produced a 22% annualized return over the last 10 years — which is 9% higher than the S&P 500.
Its occupancy is strong at 94.5%, and its net rent per square foot had a record 23.6% year-over-year increase as of the first quarter of 2022. Its financial position is incredibly strong with a ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) of 4.3 times, which is below the REIT average. And it pays an attractive 3.24% dividend yield.
Market volatility has beaten up its share price a bit, but don’t let short-term concern from investors outshine its resiliency in a housing crash.
When people can’t buy houses, they rent apartments
Mike Price (Mid-America Apartment Communities): I’m not convinced that the housing market is going to crash. Housing inventory is still low, and many buyers are able to shift down a tier and still buy a new house. That said, Mid-America, which recently rebranded itself as MAA, could give you the best of both worlds: protection in a housing crisis and upside if the market recovers quickly.
Let’s start with the housing crisis protection. MAA is a residential REIT. It owns and leases multifamily apartments; currently it owns over 100,000 total units. Multifamily real estate typically benefits from downward pressure in the housing market because some people eventually decide to give up and just rent until the market either cools off or they can qualify for a big enough mortgage.
Management says it goes above and beyond to “create value through the full market cycle.” The REIT focuses on the Sunbelt, which is currently experiencing high demand as people flee the big coastal tier 1 cities. It diversifies units by price point and geography within the Sunbelt to reach as many people as possible. The same diverse price points work in apartments: When prices go up and people can’t afford to be in a specific tier, they can shift down to the next one.
This strategy has paid off for MAA. It hasn’t missed or even reduced its dividend payment 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.
What if the market recovers? MAA has plenty of room for growth. It has a 2022 pipeline of $1 billion in new properties. It’s working on redeveloping over 13,000 units and adding smart-home technology to some units to add another layer of pricing power. Altogether, management projects blended average rent increases of 17.1% in 2022.
Look to the supporting players in biotech and life sciences
Kristi Waterworth (Alexandria Real Estate Equities): For investors concerned about how the housing market’s decline might affect their portfolios, there are plenty of options. You could choose to diversify into manufacturing or utilities, but for my money, it’s life sciences REITs. Unlike many REITs that focus primarily on office or housing, REITs like Alexandria Real Estate Equities are thinking about tomorrow’s new technology.
Because of this, the REIT’s income has been increasing steadily, as have its dividend payments. Over the last 10 years, dividends have increased by 140.86% from $1.86 in 2011 to $4.48 in 2021.
Rather than risking capital on potentially chancy new pharmaceutical developments, Alexandria provides the companies that need these kinds of spaces with large collaborative campuses in which to develop new products. Its “cluster model,” which groups related companies together on connected (or neighboring) campuses, is an interesting approach that is certainly holding the attention of its tenants.
As of the end of 2021, the company had a strong 94% occupancy rate among its properties. 91% of its properties were triple net leases, which require the tenant to pay all expenses related to the property, including taxes, insurance, and maintenance. This improves the bottom line for the landlord even further. Moreover, investment-grade or large-cap companies represent 51% of the REIT’s total annual rental revenue. Only 8% to 11% of leases will expire each year, ensuring a steady flow of income, as well as baked-in rental increases.
The need for more-specialized spaces for life sciences companies is only growing. On average, the total US employment for this sector has increased 6.6% per year since 2011. And with an aging population and ongoing pandemic, that need doesn’t seem to be slowing down anytime soon.