REITs might be right for advisors searching for yield, earnings growth
It’s not strange that commercial real estate worries continue to keep advisors and investors from loving REIT stocks. Still, maybe it’s finally time they stop worrying and love the bond alternatives.
Real estate investment trusts have not exactly sprinted out of the gate in 2024. The iShares US Real Estate ETF (IYR) is down close to 3 percent, compared to a surge of almost 8 percent in the S&P 500 index.
A lot of that underperformance stems from the nearly empty buildings in plain sight in major cities from sea to shining sea. The national office vacancy rate rose to a record-high 20 percent in the fourth quarter, according to Moody’s Analytics. The average office vacancy rate before the pandemic was just under 17 percent.
Also not helping REITs was the step-up in bond yields last year, as the benchmark 10-year Treasury flirted with 5 percent before finishing the year around 4 percent, where it currently stands. That compares to 2.8 percent for the IYR, but without the risk of so-called “jingle mail.”
That said, Treasury bonds don’t have earnings growth to help propel their shares higher. And Steve Brown, senior portfolio manager at American Century Investments, expects earnings growth in the sector to be about 4 percent in 2024.
“The REIT industry is very diversified among different sectors like data centers, towers and industrial. And office is only about 4 or 5 percent of the index,” Brown said. “So while office has issues, many other property sectors have pricing power and can raise rents greater than inflation.”
Among the real estate sectors he sees having pricing power are data centers, industrial retail, senior housing and hotels. And while the ability to charge more for a night or month’s stay is important,
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