By Paul R. La Monica

Real estate investment trusts have held up better than the rest of the stock market this year. But they aren't immune to worries about tariffs and a trade war leading to an economic downturn, which would be bad news for owners of apartments, rental houses, and other types of real estate.

The Real Estate Select Sector SPDR exchange-traded fund -- which has stakes in top residential real estate owners as well as commercial, industrial, and retail landlords -- is down more than 5% so far this month, along with the broader market. It has only fallen 2% for all of 2025, though, compared with the S&P 500's 10% drop.

But analysts at Goldman Sachs wrote in a report Wednesday that there are some residential real estate stocks that should hold up well despite rising odds of a recession. The key is to look for markets where the labor market is holding up better -- and that's largely in the so-called Sunbelt states in the south.

The Goldman Sachs analysts said demand for housing is outpacing supply in cities such as Miami, Tampa, and Austin, and that Nashville and Dallas continue to be strong markets as well. These are also the areas where the labor market has held up, despite recent softening nationally.

"Sunbelt markets continue to have the strongest employment growth fundamentals, remaining more stable in recent months versus coastal markets," the Goldman analysts wrote.

With that in mind, the analysts said that REITs specializing in multifamily apartments and/or home rentals in the Sunbelt "would be best insulated" from recession risk. For instance, they held up better during 2000-2001, the 2007-09 recession, and the immediate aftermath of the Covid-19 downturn in the spring of 2020, Goldman noted.

That group includes Mid-America Apartment Communities, Invitation Homes, American Homes 4 Rent, and Camden Property Trust. All four stocks pay healthy dividends -- as all REITs do for tax purposes -- ranging from a yield of 3.3% for American Homes 4 Rent to Mid-America's 3.9% yield.

Mortgage rates and housing prices remain elevated as well, and there continues to be a relatively low supply of homes on the market available for sale. That's likely to lead to even more demand for renting as opposed to buying.

That's one reason why home builder stocks have fallen much more sharply lately when compared with REITs. The iShares U.S. Home Construction ETF is down more than 15% this year.

But the Goldman analysts warned investors not to make bets on all apartment and home rental REITs. Ones with a big presence in the Sunbelt would likely "prove more resilient than coastal apartment REITs. The latter group includes names like Essex Property Trust, Equity Residential, and UDR.

The Goldman analysts also said that Equity Residential and UDR, as well as Camden, face the potential risk of a downturn in the nation's capital, due to federal spending cutbacks engineered by the Department of Government Efficiency.

"While we have yet to see evidence of a deterioration in Washington DC rental metrics, we are concerned the recent pullback in job postings could be [a] precursor to weakening demand," the Goldman analysts wrote.

In other words, DOGE cuts could be a reason why investors need to be wary of some apartment REIT stocks.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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April 16, 2025 16:18 ET (20:18 GMT)

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