Proving their mettle, REITs are again performing better than the other stocks, thus providing strategic additions to one’s portfolio. Also, their decent show in first-quarter earnings season signals that opportunities are widely present in this industry to fetch good returns.
No doubt a low rate environment and low Treasury yields will be catalysts in the short term, but for the long term, one should look forward to an added boost from solid fundamentals in several asset categories that REITs own and operate.
According to a study by the commercial real estate services’ firm CBRE Group Inc. (CBG), the industrial market continued its longest stretch of recovery with the 24th straight quarter of declining availability. Notably, availability fell 20 basis points (bps) sequentially to 9.2% in the first quarter while rents continued to climb.
Amid an e-commerce boom and heightened urbanization, retailers are shifting their strategy toward services like same-day delivery and other such options, propelling demand for warehouse distribution facilities. And with a larger customer base, companies are opting for supply-chain consolidation, resulting in greater demand for logistics infrastructure and efficient distribution networks, thereby creating scope for industrial REITs.
For the office market, despite the 10 basis points (bps) increase in national vacancy to 13.2% in Q1, the level is still the lowest since 2008. In fact, tiding over the hiccups in the job market recently and a modest supply rise, the office market is expected to grow at a moderate pace for the rest of the year.
Data Center REITs
With growth in cloud computing, Internet of Things and big data, and an increased number of companies opting for third-party IT infrastructure, data center REITs are experiencing a boom market. These REITs pulled in their capital and scored well on the return book, producing total returns of 8.9% in May.
Also, per the CBRE Group study, U.S. neighborhood, community and strip retail centers showed continued recovery in Q1 with a 10 bps sequential decline in average availability rate to 11.2%. Despite lackluster retails sales in the first quarter, the absence of ample supply helped the retail real estate market to address the slump. Moreover, a strong consumer spending report for April raises our hopes for a better tally in Q2.
Further, amid rising competition from online retailers, retail REITs are emphasizing omni-channel retailing. They are transforming their boring shopping hubs into swanky entertainment zones and distribution centers as well as embracing the latest technologies to offer attractive services to tenants and mall visitors. Eventually, these will only help increase traffic.
Also, small shop portfolio expansion is a priority for Kimco Realty Corporation (KIM - Analyst Report) as such shops comprise service-based industries such as saloons and spas, personal fitness, and medical practices which enjoy frequent customer traffic and are Internet-resistant.
Self Storage REIT
Self storage industry fundamentals are also strong as a result of limited new supply amid capital constraints and increased barriers to entry. And demand remains solid on the back of favorable demographic changes and events like marriages, shifting, death and even divorce. That should give ample opportunities of growth to self storage REITs.
Health Care REIT
Finally, rate issues might have a short-term adverse impact on health care REITs for their long-term leased assets’ exposure. But an increase in the elderly population and the consequent proliferation of health care expenses along with a rise in new insured individuals with health care reforms are driving demand for several types of health care.
Particularly, medical office buildings (MOBs) are opening up solid scope for growth. Consolidation among physician groups, hospitals and increasing transfer of hospital services to outpatient facilities are driving growth in this category.
Stocks to Add to Your Portfolio
Specific REITs that we recommend include Apple Hospitality REIT, Inc. APLE, CoreSite Realty Corporation COR, Summit Hotel Properties, Inc. (INN - Snapshot Report) and W. P. Carey Inc. (WPC - Snapshot Report) with a Zacks Rank #1 (Strong Buy), along with retail REITs Retail Opportunity Investments Corp. (ROIC - Snapshot Report) , Saul Centers Inc. BFS and Urban Edge Properties (UE - Snapshot Report) , and residential REITs like Armada Hoffler Properties, Inc. AHH, EdR (EDR - Snapshot Report) and Equity LifeStyle Properties, Inc. (ELS - Snapshot Report) with a Zacks Rank #2 (Buy).
Other Zacks Rank #2 REITs worth buying include DCT Industrial Trust Inc. DCT, Mack-Cali Realty Corp. CLI, Medical Properties Trust Inc. (MPW - Snapshot Report) , PS Business Parks Inc. (PSB - Analyst Report) , CareTrust REIT, Inc. CTRE, Invesco Mortgage Capital Inc. (IVR - Snapshot Report) , Two Harbors Investment Corp. (TWO - Snapshot Report) and Whitestone REIT (WSR - Snapshot Report) .
As you can see, leaving aside the rate hike issue, there are plenty of reasons to be optimistic on the REIT industry.
Check out our latest REIT Industry Outlook here for more on the current state of affairs in this market from an earnings perspective.