Investors have lately been unnerved by Fed-centric anxieties. However, they should look forward to an added boost from the solid fundamentals in certain asset types that REITs own and operate.
REIT Fundamentals Remains Stable
In fact, a look at the fundamentals of REITs confirms stability and strength. According to a recent study by the commercial real estate services’ firm CBRE Group Inc. (CBG), demand for U.S. commercial real estate was healthy in Q4, with a decline in vacancy rates across property types like the office, industrial and retail sectors amid steady absorption and a comparatively limited supply level.
The CBRE Group study revealed that the vacancy rate in the office sector declined 20 basis points (bps) sequentially to 13.2% in the fourth quarter. Notably, the national office vacancy rate has not gone up in the last 23 quarters. Going forward, U.S. office expansion is expected to continue in a solid domestic job market and amid improved economic fundamentals.
Further, the industrial market is on its lengthiest stretch of recovery with industrial availability rates also not showing a rise for 23 consecutive quarters. Last quarter saw a decline of 20 bps in industrial availability rates from the prior quarter to 9.4%.
Industrial REITs are in fact capitalizing on an e-commerce boom and heightened urbanization. With a larger customer base, companies are opting for supply-chain consolidation. This is leading to greater demand for logistics infrastructure and efficient distribution networks, creating scope for industrial REITs.
Apart from these, the retail availability rate fell 10 bps sequentially to 11.2%. Cheap gasoline, low interest rates and an improving labor market keep hope alive for growth in retail spending. No doubt, a rise in online retail sales remains an overhang on the retail real estate sector. But retail REITs have shown a stoic determination in the face of this e-commerce boom.
Companies like Simon Property Group Inc. (SPG) and General Growth Properties, Inc. (GGP) keep on aiming higher customer satisfaction and a greater footfall at their malls by emphasizing omni-channel retailing, same-day delivery, and one-stop shopping, dining and entertaining options. Kimco Realty Corporation (KIM) on the other hand, is targeting a broader small-shop portfolio. These shops comprise service-based industries such as saloons and spas, personal fitness, and medical practices which enjoy frequent customer traffic and are Internet-resistant.
Apartment demand also remained solid in the fourth quarter. According to early numbers from Axiometrics’ apartment market research, the annual effective rent growth was 4.7% in the fourth quarter, reflecting a 7 bps increase from the year-ago figure. Occupancy of 95.0% was the highest fourth-quarter rate since the end of 2000.
Importantly, household formation is increasing but housing starts are failing to keep pace, leading to greater demand for apartments. Also, home ownership cost is on the rise in several markets. Millennials are moving out from their parents’ dwelling early and are renting their own pads. But since they are paying off student debt, getting married later and are spending a huge share of their monthly income on rents, they end up struggling for a mortgage, thus keeping demand for residential units strong.
Moreover, economic improvement, migration for jobs and living in comparatively smaller apartments near cities is driving up demand for storage REITs.
Opportunities in other spaces exist as well. 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 is driving demand for several types of health care facilities and senior housing.
Also, with manageable travel costs and energy savings, leisure travel is expected to get a boost and lodging/resorts REITs stand well to gain from that.
Stocks to Add to Your Portfolio
Specific REITs that we recommend include Extra Space Storage Inc. (EXR), Mack-Cali Realty Corp. (CLI) and W. P. Carey Inc. (WPC) with a Zacks Rank #1 (Strong Buy), along with retail REITs Simon Property Group, Regency Centers Corporation (REG) and Taubman Centers, Inc. (TCO), and residential REITs like Avalonbay Communities Inc. (AVB), Mid-America Apartment Communities Inc. (MAA) and Select Income REIT (SIR) with a Zacks Rank #2 (Buy). Other Zacks Rank #2 REITs worth buying include Prologis, Inc. (PLD), Public Storage (PSA), SL Green Realty Corp. (SLG), Sotherly Hotels Inc. (SOHO), Sovran Self Storage Inc. (SSS) and Lamar Advertising Co. (LAMR).
Bottom Line
As you can see, leaving aside the rate hike and Treasury yield 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.
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WP CAREY INC (WPC): Free Stock Analysis Report
TAUBMAN CENTERS (TCO): Free Stock Analysis Report
SOVRAN SLF STOR (SSS): Free Stock Analysis Report
SIMON PROPERTY (SPG): Free Stock Analysis Report
SOTHERLY HOTELS (SOHO): Free Stock Analysis Report
SL GREEN REALTY (SLG): Free Stock Analysis Report
SELECT INCOME (SIR): Free Stock Analysis Report
REGENCY CTRS CP (REG): Free Stock Analysis Report
PUBLIC STORAGE (PSA): Free Stock Analysis Report
PROLOGIS INC (PLD): Free Stock Analysis Report
MID-AMER APT CM (MAA): Free Stock Analysis Report
LAMAR ADVER CO (LAMR): Free Stock Analysis Report
KIMCO REALTY CO (KIM): Free Stock Analysis Report
GENL GRWTH PPTY (GGP): Free Stock Analysis Report
EXTRA SPACE STG (EXR): Free Stock Analysis Report
MACK CALI CORP (CLI): Free Stock Analysis Report
CBRE GROUP INC (CBG): Free Stock Analysis Report
AVALONBAY CMMTY (AVB): Free Stock Analysis Report
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