How Do REITs Weather Economic Downturns? A Recession Performance Analysis

Real estate investment trusts (REITs) have long intrigued investors seeking portfolio diversification. These investment vehicles require that at least 75% of assets remain tied to real estate and 75% of income derives from real estate operations. Crucially, REITs must distribute at least 90% of profits to shareholders as dividends. But the central question remains: how do REIT investments actually perform during recession cycles, and should they occupy a defensive position in your portfolio?

The historical data tells a compelling story. From 1972 through 2024, U.S. REITs delivered an average annual return of 12.6% — substantially outpacing the S&P 500’s 8% average over the same period. However, recent years have shifted this narrative. During the past five years, REITs yielded just 5.5% annually, trailing far behind the S&P 500’s impressive 15.3% performance. This divergence raises an important question: are REITs genuinely protective during economic stress?

Understanding REIT Behavior During Recessions

When economies slide into recession, REITs have historically taken significant hits. Research from Neuberger Berman analyzing economic cycles spanning 1991-2024 revealed that REITs averaged negative returns of -17.6% during recession periods. For perspective, the S&P 500 performed even worse, dropping more than 20% on average.

Yet the story contains nuance. Edward Pierzak, Senior Vice President of research at Nareit, points to an often-overlooked pattern: REITs typically maintain positive momentum before economic contractions arrive. In the 12 months preceding the last six recessions, REITs returned an average of 5.7%, suggesting investors with proper timing could capture gains before downturns strike.

The key distinction emerges in the comparison with private real estate. “Over the past six recessions, REITs outperformed private real estate during a recession, and they also outperformed private real estate in the four quarters after a recession,” Pierzak noted. This advantage stems from REIT liquidity—public market securities adjust prices far more rapidly than private property transactions.

Why REITs Surge After Economic Contractions

Perhaps most striking is REIT behavior immediately following recessions. In the 12 months after the last six recessions ended, REITs generated an average return of 22.7%—a dramatic turnaround from the downturn losses.

This rapid recovery mechanism traces directly to interest rate dynamics. Real estate valuations, particularly for commercial properties encompassing apartments and office buildings, respond acutely to interest rate movements. Cap rates—the yield metrics determining property values—move in lockstep with central bank rates.

During recessions, central banks almost universally cut interest rates to stimulate economic activity. Lower rates compress cap rates, which mechanically drives up commercial property valuations. Because REITs trade on public exchanges, this repricing happens almost instantaneously. Financial markets typically look 12-18 months ahead rather than focusing on current valuations, meaning REIT prices begin recovering before the recession officially ends.

Asset Type Matters: Which REITs Prove Most Recession-Resistant

REIT investors can access numerous specializations: multifamily residential properties, office space, hotels, industrial facilities, or data centers. These different segments display markedly different recession resilience profiles.

“During a recession, sectors like office space and hotels will underperform,” explained Peter Zabierek, CEO and REIT portfolio manager at Sugi Capital Management. “But others, like data centers and cell towers, will outperform.”

A 2025 analysis by Wide Moat Research identified specific winners and losers. Data centers, healthcare facilities, and triple net lease properties emerged as the most recession-defensive categories. These segments maintain steady demand even during economic contractions. Conversely, hotel REITs, billboard companies, and those holding mortgage loans face steeper declines during downturns, as discretionary spending and travel activity contract sharply.

This differentiation matters enormously for strategic positioning. An investor braced for recession should consider rotating exposure toward healthcare and data center REITs, while reducing exposure to hospitality and office-focused trusts.

Key Takeaways for REIT Investors

What emerges from this analysis? Several critical insights for those considering REIT allocations:

First, REITs demonstrate greater downside protection than the broader equity market during recessions. A -17.6% decline, while painful, substantially exceeds the S&P 500’s typical -20% performance.

Second, REIT category selection proves decisive. Healthcare and data center REITs provide superior downside cushioning if you anticipate economic deterioration. These sectors benefit from structural trends—aging populations driving healthcare demand, digital transformation accelerating data center requirements—that operate independently of recession cycles.

Third, the rebound potential following recessions positions REITs as potential tactical opportunities during the darkest moments of economic contraction. The 22.7% average post-recession gain rewards investors with the conviction to hold through downturns or the timing acumen to deploy capital at the cycle bottom.

Ultimately, REIT performance during recession reflects a nuanced reality: broad equity markets typically decline more, but the category mix matters tremendously. Strategic investors recognizing these dynamics can construct REIT portfolios designed to navigate economic stress more effectively than undifferentiated equity exposure.