One of our subscribers recently wondered how our real estate investment trusts (REITs) might fare if Canada’s housing bubble implodes.

However, except for two, the recommended REITs in our legacy portfolios invest solely in commercial real estate across the office, industrial and retail subsectors. So the challenges they face are distinct from those of the headline-grabbing residential real estate market.

And Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF), the one REIT in our portfolios that’s geared entirely toward dwellings, has recession-resistant qualities thanks to its focus on multifamily housing.

Apartments are among the more resilient real estate subsectors during downturns, as their properties are diversified across many more tenants than commercial real estate while benefiting from an increase in demand from those who can no longer afford to be homeowners.

Canada’s apartments sector has enjoyed a long period of stability, because demand remained consistent while new supply has been minimal, according to commercial real estate firm CBRE.

Buy CAPREIT below $25.

Unfortunately, as evidenced by the vacancy rates among some of Northern Property REIT’s (TSX: NPR-U, OTC: NPRUF) holdings, there are exceptions to multifamily housing’s usual resilience.

More than three-quarters of the REIT’s revenue is derived from apartments, townhomes and single-family rental units. And a quarter of its revenue comes from Alberta, where the vacancy rates in some areas are approaching 20% to 25%.

The reason for this lackluster performance is mobility. During the energy boom, high wages lured Canadians to the province, and their numbers spurred an increase in residential construction. But once things went bust, those newcomers had little reason to stick around, resulting in rising vacancies exacerbated by a surplus of new multifamily housing.

As such, Northern Property’s unit price has dropped about 26.1% from its trailing-year high in local currency terms. Most of the damage occurred during the final two months of 2014, when crude’s steady decline accelerated into an outright collapse. Consequently, we downgraded Northern Property REIT to a Hold in January.

For our other REITs, the most pressing concern at present is how the oil shock will ripple through the country’s economy. Of course, crude oil’s collapse has been a drag on overall gross domestic product (GDP) growth, so to some extent there’s no escaping it.

Nevertheless, one obvious way of gauging risk is to narrow our focus to REITs with portfolios that have the greatest exposure to the resource-rich province of Alberta, which is the epicenter of energy sector turmoil. The province is widely expected to go into recession this year, as falling prices for energy commodities precipitated dramatic cuts in oil-and-gas sector spending.

Although Alberta’s unemployment rate, at 5.7%, remains more than a full percentage point below Canada’s overall unemployment rate, that statistic masks serious deterioration in the job market there.

Indeed, the ranks of the unemployed have jumped 19.7% over the trailing year, as thousands of highly paid workers in the energy sector were laid off.

The Calm Before the Storm?

Among our recommended REITs in the commercial real estate market, those whose portfolios have significant holdings in Alberta are: Artis REIT (TSX: AX-U, OTC: ARESF) and Dream Industrial REIT (TSX: DIR-U, OTC: DREUF).

Artis is well diversified across the three main commercial real estate subsectors—office space accounts for about half of its net operating income (NOI), while retail and industrial each contribute a quarter of overall NOI. But from a geographic standpoint, it’s heavily concentrated, with nearly 40% of NOI coming from Alberta.

The REIT started out in Western Canada, but it has taken advantage of historically low interest rates to expand into other parts of Canada, as well as the United States.

As management conceded during its first-quarter analyst call, Artis earns about 17% of its NOI from Calgary office properties, and it expects that city’s office market to suffer from lower activity in the oil-and-gas sector. At the same time, management noted that vacancy rates are holding up well in the province—occupancy plus commitments stood at 95.5% at quarter-end, up three-tenths of a point from a year ago.

Lease expiries are staggered so that an average of just 12% of its total square footage in Alberta is up for renewal over the next three years. That limits the risk of recontracting at lower rates in a weak market.

Buy Artis below $16.

Dream Industrial, Canada’s largest pure-play industrial REIT, derives about 38% of NOI from its Western Canada sleeve, which includes property in both Alberta and Saskatchewan. Though the REIT does not provide a further breakdown by province, the vast majority of its square footage in the region is domiciled in Alberta.

During the first quarter, management said that it continues to see positive leasing activity in Western Canada, with rent increases on renewals and a 78% retention rate, well above the 60% retention rate for expiries across its overall portfolio during the quarter.

“We have yet to see any negative impact on leasing or our receivables from the decline in oil prices,” management observed, though it’s monitoring the situation closely.

At quarter-end, Dream’s occupancy rate for its properties in Western Canada stood at 97.8%, which was 2.5 percentage points above its overall portfolio.

Dream’s Alberta properties have an average remaining lease term of 4.3 years, in line with its portfolio average. Like Artis, Dream’s expiries are staggered so that a relatively small percentage of its portfolio is up for renewal in each of the next three years.

Buy Dream below $11.