Real estate investment trusts have hit the skids in 2022, with the FTSE Nareit index of total returns for the sector dropping 28% year to date.
Soaring interest rates have hammered the securities. Rising rates hurt them because REITs generally borrow money to buy properties, and higher rates make that borrowing more expensive.
In addition, climbing rates mean higher yields for bonds, which compete with REITs for investors’ attention.
I think REITs’ decline this year presents some buying opportunities and have started to make some purchases.
I don’t want to purchase too much now because the Fed is poised to raise interest rates further, which will likely push REIT prices down further.
The sectors I’ve bought into are apartments, data centers and industrial (warehouse) REITs.
Apartments should benefit from the lack of affordable homes to buy, which will likely keep many people in rentals.
Data centers, which hold computer equipment, should benefit from the growth of cloud computing and various data services.
Industrial REITs should benefit from the growth of e-commerce, which will require more space for warehouses and distribution centers.
Here is Morningstar’s take on three of the REITs that I’ve picked up.
Apartments: Avalon Bay Communities (AVB)
“It owns and operates high-quality multifamily [apartment] buildings in urban and suburban coastal markets with demographics that allow the company to maintain high occupancies and drive strong rent growth,” Morningstar analyst Kevin Brown wrote in a commentary.
Those locations include New York/New Jersey, the mid-Atlantic, California, and Seattle.
“These markets exhibit traits that create strong demand for apartments, like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers that draw younger people,” Brown said.
To be sure, “we are cautious about AvalonBay's growth prospects, given that new supply has been high in many of its markets,” he said.
Data Centers: Equinix (EQIX)
“It is the largest provider of colocation data centers in the world, and it has developed network-dense locations in major cities that would be extremely difficult for competitors to replicate,” Morningstar analyst Matthew Dolgin wrote in a commentary.
“Telecom networks, cloud-service providers, and other enterprises house their equipment and connect with each other at Equinix locations, and the presence of each attracts the others.”
Further, “we expect the importance of interconnection will continue to grow, and in our view, no company is better positioned to take advantage than Equinix,” Dolgin said.
Industrial REITs: Prologis (PLD)
“It acquires, develops, owns, and operates industrial facilities that are strategically located in markets characterized by large population densities, growing consumption, and high barriers to entry,” Morningstar analyst Suryansh Sharma wrote in a commentary.
These facilities are typically near large labor pools and extensive transportation infrastructure.
“The firm's strategy is to leverage the organizational scale of its 1-billion-square-foot portfolio to provide a single point of contact to address the logistical needs of its multimarket clientele,” Sharma said.
“The firm's strategically located global land bank has the potential to support the lucrative development of approximately $26 billion in new industrial projects in upcoming years.”
The author owns shares of Avalon Bay, Equinix and Prologis
