They have been the lump of coal in the Trump rally’s equity gift bag: real estate investment trusts.
Investors, however, may be missing out on a good buy, especially in one fast-growing REIT sector: warehouses. These nondescript buildings may be the least sexy sector in real estate, but demand for them is outstripping supply, and rents are rising fast, all thanks to the stunning growth of e-commerce. Still, investors have been leery lately of even this REIT sector, as they shy away from commercial real estate stocks in general.
REIT stocks have lagged other sectors despite solid fundamentals in the commercial properties they represent. Why? It all has to do with interest rates rising.
REITs are required to pay out at least 90 percent of their taxable incomes annually in the form of shareholder dividends. That makes them attractive yield plays when interest rates are very low, which they have been for years. Now, with rates rising and the Federal Reserve expected to hike rates on Wednesday, investors have been selling off REITs.
“I think in the last couple of years, there’s been this fascination with the Fed and interest rates, and every time there is a rate tantrum, REITs get hit. But they all come back because fundamentally REITs house businesses,” said Hamid Moghadam, CEO of Prologis, the largest industrial REIT in the nation. “When business is doing better, which is why yields are going up and everybody’s so excited about infrastructure and higher levels of economic activity, well, that aspect of REITs is going to be very attractive. There is going to be higher growth as a result of that.”
While e-commerce represents just under 10 percent of Prologis’ industrial real estate portfolio, it accounts for about 30 percent of the REIT’s new development activity, according to Moghadam. New development includes projects closer in to metropolitan areas, as e-commerce companies now seek to deliver goods to consumers in hours rather than days. Prologis is also developing some of the first multistory warehouses in denser neighborhoods. FedEx Ground and Amazon, shipping smaller packages, are big tenants.
