Real estate investment trusts have been hit by a sharp rise in interest rates this year, with the FTSE Nareit REIT Index down 28% year-to-date.
In addition, REITs borrow heavily to finance property purchases, and higher interest rates increase borrowing costs.
REITs could fall further as the Federal Reserve decides to keep raising interest rates. But given how much they’ve plummeted already, now might be a good time to start taking a bite. Here are some areas to consider in the REIT market.
Of course, warehouses and distribution centers, which make up the majority of industrial REIT holdings, are essential to e-commerce.
And warehouse/distribution center owners built buildings early in the pandemic when online purchases surged. The warehousing sector is oversupplied at a time when online purchases have slowed.
But Internet buying has had a long growth ahead of it. E-commerce accounted for just 14.5% of retail sales in the second quarter. It is very likely that that number will increase significantly in the next few years.
The largest real estate REIT is Prologis (PLD) .
Morningstar analyst Suryansh Sharma said: Commentary.
Additionally, “the company’s strategically located global land bank could support the profitable development of approximately $26 billion in new industrial projects over the next few years.”
Sharma has listed the fair value of the stock at $128. That puts him 22% above his recent trade of around $105.
Rising home prices over the past two years and higher mortgage rates this year have pushed many people to stay in rental housing.
This rental demand is clearly good news for multifamily owners. Also, since leases typically only last one year, landlords have plenty of pricing power when setting rents.
They are leveraging their power in key markets. For example, according to apartment rental platform Zumper, his average rent for his one-bedroom apartment in Miami was $2,590 as of Oct. 1, up 15% from the year before.
The largest condominium REIT is Avalon Bay Community (AVB) .
Morningstar analyst Kevin Brown says he owns and operates high-quality multifamily homes in urban and suburban coastal markets such as New York and California, which maintain high occupancy rates and see significant rent increases. demographics that can promote
“These markets exhibit characteristics that create strong demand for apartments, such as rising employment, high cost of single-family housing and attractive urban centers that attract young people.”
Brown sees the fair value of AvalonBay stock at $234.
data center REITs
The explosive growth of cloud computing requires massive amounts of computers and communications equipment housed in data centers, and this growth is likely to continue.
The largest data center REIT is Equinix (EQIX) .
“Equinix is the world’s largest provider of colocation data centers, developing network-dense locations in major cities that are very difficult for competitors to replicate,” said Matthew Dolgin, Morningstar analyst. (Matthew Dolgin) writes in the commentary.
“Telecom networks, cloud service providers, and other companies house equipment and interconnect at Equinix locations, each attracting others with its presence.
“We expect interconnection to continue to grow in importance, and in our view, no company is better positioned than Equinix to take advantage of it.”
“Equinix hosts by far the most cloud onramps of any data center provider in the world,” said Dolgin. “The outlook for Equinix is bright as companies increasingly rely on a hybrid cloud model that uses a combination of proprietary hardware and cloud services.”
He estimates the fair value of the stock at $560, about 3% below recent trading near $577.