Here’s a question we get all the time: What happens to the REIT in a recession? Am I protected? Unsurprisingly, the concern comes in waves, usually after a volatile day for stocks and “MARKETS IN TURMOIL” headlines flashing across CNBC.
It’s an incredibly broad topic and if you get me started on why everyday investors should get out of the habit of picking individual properties or stocks or checking their portfolios daily or trying to time investments around recessions, you may regret that you asked. What I’ll say for now is:
- It’s harder to sit on your hands and let your assets do the work for you if you check your accounts daily.
- Beating the stock market is hard.
- Picking individual properties is as difficult as always picking winning stocks.
More specifically to the original question, what happens to the REIT in a recession? Let’s be upfront about one thing: All investing involves risk. There’s no asset on the planet (save for perhaps US treasuries) that is “recession proof.”
Commercial Real Estate in Desirable Locations
Are there risk assets that are more recession resistant than others? Sure, there’s a scale. Hotels tend to respond poorly to economic slowdowns because of daily revenue resets and short-term bookings, whereas a long-term net leased property to strong corporations ought not be affected as much by near term GDP or job market fluctuations.
Our objective as investors is to find the appropriate balance between risk and reward and to find those properties that have moats in an appealing product, an ‘A’ location, with quality tenants.
Strong Rent Roll & Tenant Portfolio
We believe that the portfolio we have today (and continue to construct) exhibits strength in each of these areas and believe we are well positioned to ride out a recession.
- We have strong tenants and are well occupied with in-place leases. For example, Allied Solutions has 108K sqft until 2030 and is a tenant that is seeking to grow its employee base in the future.
- Our tenants’ financial strength should protect the REIT’s income stream from any potential economic headwinds in the near-to-medium term.
- It’s not impossible for a tenant to experience hiccups in its business, but unlike apartments or hotels or other products that generate income from short term contracts or non-credit customers, we have gone through an extensive process to ensure as best as possible that our customers (our tenants) will be able to withstand market fluctuations and honor their leases.
Suppose instead, that a tenant doesn’t default on their lease, but that we come upon a recession during a period when several leases expire, and our tenants opt not to renew. This is a plausible scenario. And in these times, we are supported by our moat of differentiated product in desirable locations.
In this scenario, when tenants return to the market, our buildings are at the top of the list because we have curated a portfolio of first-to-lease buildings. Vacancies in the portfolio may temporarily dip, but we focus so singularly on the attractiveness of our properties that we believe our properties are able to bounce back quickly.
Efficiently Leveraged with Long Term Debt
Lastly, we believe our balance sheet, with low leverage (55% portfolio average currently) and long term debt, put the REIT in a position to allow us the flexibility to operate in weak economic environments significantly better than would our higher-leveraged competitors.
We launched the REIT when we saw an opportunity to buy well-located assets in secondary markets at prices that offer protection against a slower economic backdrop while still providing risk-adjusted dividends that we think are attractive.
Reasonable Expectations of Return
We never intended to shoot for the moon and post the highest returns and we never set out with a growth-at-all-costs mentality. We wanted, for ourselves and for our investors, the ability to look past the inflammatory clickbait news articles and the yapping TV pundits when the market screens are exclusively red. Look past the headlines, look past the recessions, focus on positioning to withstand corrections and come out strong on the other side.
Eliot Bencuya is the co-founder and CEO of Streitwise. Eliot has extensive experience identifying, underwriting, and executing value-add real estate investments.
Prior to forming Streitwise, he was a Vice President of Acquisitions for Canyon Capital Realty Advisors and the Canyon-Johnson Urban Funds, where he was responsible for originating, underwriting, structuring and executing transactions in the Pacific Northwest, Northern California and Midwest regions. Mr. Bencuya also held positions at Sovereign Investment Company (a subsidiary of the Marcus and Millichap Company) and the investment banking division of Merrill Lynch & Co. He holds a Bachelor of Arts degree in Economics and International Studies from Yale University, and a Masters of Business Administration degree from the Haas School of Business at the University of California, Berkeley. Mr. Bencuya is a member of ULI.