CBRE (a commercial real estate investment and services company) reports that commercial property values have fallen 15% in the past 12 months, led by a 25% decline in office value. But with interest rates and inflation perhaps having peaked, these broadly declining prices might present the best opportunity since the Great Recession to pounce on some prime properties.
Real estate investment has long proven to be a great way to build wealth. It can, however, be time-consuming to manage and beyond the reach of many everyday investors without the kind of cash it takes to buy major properties on their own.
An easy way for individual investors to join in is by taking a stake in real estate investment trusts (REITs) whose markets and niches make them particularly promising candidates to prosper in the months ahead.
REITs pool income-producing properties and are required by tax law to pay out at least 90% of their taxable income as dividends. They were created in the 1960s to provide the average investor an avenue for commercial real estate investment and since then have become a major source of passive income for millions.
Data by YCharts.
Let REITs do the curating for you
Rising interest rates and inflation have combined with recession fears to hammer REITs overall. The chart above shows just how much that sector has trailed the greater market since the pandemic, using two benchmark exchange-traded funds for the comparison. The Vanguard S&P 500 ETF tracks the performance of that closely watched index, while the Vanguard Real Estate ETF holds a collection of 160 of the 220 or so publicly traded REITs.
But the damage hasn't been unilateral. REITs also offer the opportunity to focus your money on industries that have held up well and on those that have been pummeled but may well be positioned for a nice comeback.
There are retail REITs, healthcare REITs, residential REITs, infrastructure REITs, industrial REITs, among others. Some own a mix of property types. Well-run REITs in promising industries are a great choice for investors who would rather someone else take the time to choose long-term investments in this realm.
This report highlights the likely sectors
The Urban Land Institute (ULI) just released its Real Estate Economic Forecast for this year through 2025, basing its assessments on surveys and data from 37 major investment, advisory, and research organizations.
The ULI report predicts the downturn will continue this year, finishing 2023 with an 8% drop that would make it the worst year for commercial real estate prices since 2010. But then growth should return in 2024 with a gain of 2.4% in prices, followed by a 5% jump in 2025.
As for individual property types, the report states:
Availability rates for neighborhood and community shopping centers are expected to remain unchanged. Industrial availability rates are expected to inch up slightly but remain tight by historic standards. Office vacancy, already at elevated rates, is expected to increase another 135 basis points in 2023.
Choose wisely for a recovering market
So investors who want the liquidity and regular dividend income that REITs can provide may want to consider retail landlord stalwarts such as Realty Income and Agree Realty, as well as logistics space leaders like Prologis and Stag Industrial. These are the types of companies with the chops and the credit to take advantage of bargains in their spaces.
Large office REITs like SL Green Realty and Vornado Realty Trust have been badly hammered, but there doesn't appear to be a big silver lining for them unless workers suddenly start returning to the office en masse in the city centers of major U.S. metros.
After all, for REITs and any other owners of commercial real estate, it begins with occupancy, and if the people aren't there, neither are the profits.
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Marc Rapport has positions in Agree Realty, Prologis, Realty Income, Stag Industrial, and Vanguard Specialized Funds - Vanguard Real Estate ETF. The Motley Fool has positions in and recommends Prologis, Stag Industrial, Vanguard S&P 500 ETF, and Vanguard Specialized Funds - Vanguard Real Estate ETF. The Motley Fool recommends Realty Income. The Motley Fool has a disclosure policy.
