Uncertainty about Fed policy has affected REIT stock prices lately, but the industry has enough reasons to cheer up investors. This is because, not only did the industry carve a niche and earn its own headline sector under the Global Industry Classification Standard (GICS), Fed officials keep repeating that they plan to keep rates low for an extended period, which should be a net positive for the REIT space in the long run.
No doubt, the exclusive REIT headline sector will draw in billions and push up valuations over time. Moreover, a steady rate, at least in the near term, would help in making their dividends more attractive than yields on other money market and fixed income accounts. But the drivers of REITs are not limited to only these factors. REITs have ample scope to excel going forward. In fact, for gains over the long term, one should look forward to an added boost from solid fundamentals in several asset categories that REITs own and operate.
In the industrial REITs market, demand for space has been fairly strong. This is because, amid economic expansion, an e-commerce boom and heightened urbanization, companies 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 to flourish.
In apartment markets, supply has been a major concern in recent months, particularly in the high end and luxury apartment categories. However, market fundamentals are still steady in the mid-range markets. In fact, residential REIT Apartment Investment and Management Company (AIV) – commonly known as Aimco – with a portfolio that is diversified both in terms of geography and price point is still enjoying relatively stable revenues.
Moreover, the student housing market recorded solid rent growth in the fall 2016 leasing session, though leasing slowed to some extent, per a recent study by Axiometrics. Going by statistics, the effective rent levels for fall 2016 have averaged $618 per bed nationally. This denotes a rise of 2.3% from a year ago, with the majority of properties averaging in the range of 2–4%.
Notably, student REITs lease their units to students, and hence their properties are generally situated in close proximity to colleges and universities. Therefore, enrollment growth ends up being a major driver for such assets. With a higher education earnings gap – millennials with a high school diploma earning just 62% of what the college graduate is making – enrollment statistics is expected to get a boost. Also, there is pent-up demand for new, purpose-built student housing properties that they prefer to shift to, given their better amenities than old, outdated housing.
For retail REITs, the absence of ample supply is expected to help keep the fundamentals favorable. Also, upbeat consumer confidence and increasing consumer spending amid an improving economy infuse optimism into the retail market. And a projection of 3.6% increase in holiday sales this year by the National Retail Federation, which is above the 10-year average growth of 2.5%, further raises hope for the retail market.
Obviously, mall traffic declines and store closures remain lingering issues. But amid rising competition from online retailers, retail REITs are focusing on the omni-channel retailing concept. 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, retail REITs like Kimco Realty Corporation (KIM) are prioritizing the expansion of the small shop portfolio. 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, thereby offering a strategic way to beat online retailing blues.
Data Center REITs
Data center REITs are experiencing a boom market. This is being driven by growth in cloud computing, Internet of Things and big data, and an increased number of companies opting for third-party IT infrastructure. These REITs pulled in their capital and scored well on the return book, producing total returns of 25.39% in the first nine months of 2016.
With economic improvement and recovery in the job market, healthy growth in demand for office spaces is expected. This is because as the economy revives and business grows, corporate sectors seek expansion and rent more space to accommodate an increased workforce. However, with a modest supply rise, the office market is expected to grow at a moderate pace for the rest of the year.
Health Care REITs
Finally, the increase in the elderly population is expected to take place at a significantly higher rate than the overall population in the next 8 to 10 years, and this elderly age cohort is an important component of health care utilization. Therefore, the consequent proliferation of health care expenses along with a rise in new insured individuals with health care reforms is expected to continue driving demand for several types of health care.
Medical office buildings are opening up solid scope for growth. Consolidation among physician groups, hospitals and increasing transfer of hospital services to outpatient facilities are boosting demand in this category. Therefore, despite the lingering rate issues and their adverse relation with health care REIT’s long-term leased assets, selective investments in health care REITs can help scoop up returns.
Stocks to Add to Your Portfolio
Specific REITs that we prefer include American Tower Corporation (AMT - Analyst Report) , Equinix, Inc. (EQIX - Analyst Report) , The Macerich Company (MAC - Analyst Report) and Mack-Cali Realty Corp. (CLI - Analyst Report) .
American Tower, a wireless communications and broadcast infrastructure company, is a steady performer, having beaten the Zacks Consensus Estimate over all the trailing four quarters, with an average surprise of 6.16%. It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Equinix, a data center REIT, has a long term growth rate of 16.9%, well ahead of the industry average of 5.5%. Equinix currently has a Zacks Rank #1.
Macerich, a retail REIT, has a Zacks Rank #2 (Buy). It has a dividend yield of 3.48% and is a consistent performer, having beaten the Zacks Consensus Estimate in each of the trailing four quarter with an average beat of 3.61%.
Mack-Cali, which is engaged in office and multi-family real estate assets, currently has a Zacks Rank #2. Estimates for the company for current quarter and full year 2016 are trending up, suggesting bullishness ahead.
Check out our latest REIT Industry Outlook here for more on the current state of affairs in this market from an earnings perspective.
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