Some REIT sectors look better than others

Real estate investment trust analysts say REITs are a good piece of a diversified investment portfolio, but some types of REITs appear poised to perform better than others.

“Broadly, REITs have been doing well for the last several years,” said Paula Poskon, senior research analyst of real estate for Milwaukee-based Robert W. Baird. & Company Inc.

“They’ve delivered very good returns the last couple of years,” said Mike Salinsky, director at RBC Capital Markets.

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Overall, REIT prices are up 12 percent year-to-date. But they have been outperformed by the S&P 500 which is up 14 percent year-to-date, Poskon said.

Investors that put money into REITs at the bottom of the Great Recession gained substantial returns as the economy has recovered, but that opportunity is now past, Salinsky said.

“If you think you are going to jump into REITs to try to hit a home run, you’re probably too late to the game for that one,” he said. “The years of us going up 30 to 40 percent, I think we’re way past that point.”

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REITs provide investors with a highly liquid way to invest in commercial real estate and gain dividends from the investment. REITs are required to distribute at least 90 percent of their taxable income to investors in the form of dividends.

REITs will be an attractive investment option until interest rates rise, Poskon said. When that happens many investors will seek other investment alternatives that perform better when interest rates are higher, and that could result in a REIT sell-off. However, interest rates likely will only go up when the economy is stronger and a stronger economy will benefit REITs, no matter what happens to interest rates, she said.

“That could be a rising tide that lifts all boats, including REITs,” Poskon said. “Some cash on the sidelines might flow into the REIT space.”

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“(REITs are) a space like a lot of other spaces, you really need the economy to pick up,” Salinsky said.

To get the economy into a stronger growth mode Washington needs to “resolve the fiscal cliff, bring clarity to tax policy and get serious about tackling the debt,” Poskon said. She expressed doubt that will occur.

“I think we’re in for more of the same,” Poskon said.

With that in mind, Poskon said she favors REITs that are invested heavily in safe haven real estate sectors including multi-family housing, student housing and self storage.

Poskon said she is bearish on the recovery of the single family housing market and expects the apartment market to remain strong for some time as many are still reluctant to buy a home after the collapse of the housing market that largely led to the Great Recession.

“This generation of renters is placing a high value on flexibility,” she said. “They are reluctant to (buy a home and) marry themselves to a geography because of the weak economy.”

However, there is concern in some markets that apartments have been overbuilt. Poskon works in Washington D.C. where, “there are a lot of cranes in the center of D.C. building new, luxury apartments.” Perhaps in part because of that overbuilding concern multifamily REITs dipped 2 percent in the third quarter.

The student housing market should benefit from the rising population of college aged students, the members of the so-called echo boom, and the lack of new student housing development in recent years, Poskon said.

“We still have a significant demographic wave of young people coming,” she said. Only three REITs specialize in student housing, she said.

Self storage units get business as a result of life-changing events (marriages, divorces, military deployments, people moving) that are not affected by the economic cycle, Poskon said.

RBC is bullish on the hotel industry, Salinsky said. National hotel room supply is low relative to recent rises in occupancy rates, he said. As the economy has improved leisure travelers have taken advantage of low prices, boosting hotel occupancy. That could lead to higher hotel room prices as business travelers and travel groups continue to increase their travel plans later in the recovery cycle, he said.

“Hotels have had a nice run up to date,” Poskon said.

Retail, hotel and industrial REITs are all up more than 20 percent year to date, she said. Health care REITs were up 2.3 percent in the last quarter.

Suburban office has been the weakest commercial real estate sector lately, Salinsky said. Those office spaces are largely seen as commodities and they have been hurt by corporate downsizings, he said. More businesses are moving to central business districts, which typically recover before suburban office markets, he said.

Poskon is bearish on suburban and downtown office markets.

“I think it’s going to be awhile before office picks up,” she said.

Baird recently downgraded its outlook for retail real estate, in anticipation of a weak holiday shopping season as the upcoming presidential election and the pending fiscal cliff that could result in significant federal tax increases next year create uncertainty for consumers, Poskon said.

Nevertheless, “I’m not sure I’d be a seller of anything I’m currently holding,” she said. n

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