Equity real estate investment trusts (REITs) offer commercial real estate (CRE) investors a compelling blend of stability, diversity, and growth potential. How? By offering them a stake in the capital growth and profitability of real estate assets ranging from commercial and retail centers, to highly specialized niche sectors like healthcare and self-storage.
The main benefit of a REIT is that investors can attain financial returns without direct ownership of the properties, thus reducing their risk.
It’s still important to have a basic understanding of the different types of properties your chosen equity REIT owns and manages, however.
What Are Equity REITs?
Equity REITs are trusts that own and manage income-generating real estate properties. They generate income mainly from rentals, capital appreciation, and property management fees.
What’s the Difference between an Equity REIT and a Mortgage REIT?
There are two main types of REITs of which an equity REIT is one. The other is a commercial mortgage REIT which primarily invests in mortgage-backed securities and loans. The main difference is that equity REITs directly own and manage actual properties, whereas mortgage REITs do not.
This key distinction means that equity REITs are property owners and managers. Mortgage REITs on the other hand, act more like lenders, profiting from interest and mortgage payments.
The Role of Equity REITs in CRE
Equity REITs form a significant component of the CRE space.
Their primary role is to acquire, manage, and eventually sell real estate assets while providing investors with a steady income stream.
With billions of dollars in assets, their influence on the market is considerable.
Some well-known equity REITs in the United States include:
- Equity Residential – a major player in the apartment market
- Simon Property Group – one of the largest shopping mall operators
- Prologis – specializing in industrial and logistics real estate
Types of Assets Managed by Equity REITs
There are several reasons why an investor might be interested in the types of assets managed by an equity REIT. Top of the list would be your risk profile. Different types of assets come with different levels of risk. Retail, for example, is more volatile than healthcare.
If you’re diversifying your investment portfolio and looking for an equity REIT to join, you’d be interested in whether the properties managed by that REIT meet your investment needs and expectations.
Most REITs manage the ’conventional’ kind of real estate like offices and shopping malls, but some specialize in very specific sectors like self-storage or renewable energy.
To help you with your research, here’s what you need to know about each asset type.
1. Office Buildings
Most equity REITs manage a few (or many) prime office buildings with high market values. These generate consistent rental income and potential long-term appreciation. Office buildings generally provide a solid base of stable assets for any kind of REIT.
The location of the office building has a direct impact on tenant demand and rental rates. A state-of-the-art skyscraper in New York City is going to demand a higher rent than a small office block in a less urban area.
You’ll also find the tenant mix in central business districts to be more diverse than in rural outskirts. A diverse tenant mix mitigates risks and helps to keep cash flow steady.
Equity REITs maintain and manage their office buildings to a high level in order to attract and keep top-quality tenants. This helps to keep revenue steady, and therefore reliable for investors.
Key Takeaway:
Remote work trends are influencing office space demand, making location and good quality amenities crucial.
2. Retail Centers
Many equity REITs own and manage retail assets like malls, shopping centers, and other types of retail spaces. Retail centers in prime locations are attractive to investors due to their stable income.
While retail is a dynamic and changeable sector of CRE, it offers profitable returns. Some of the changing dynamics affecting retail include:
- The growth of e-commerce
- Need to keep up to date with fashion and trends
- Customer expectations for ‘experiential’ shopping
- Need to keep up with competitors
- Need to stay in tune with technology
Retail center success relies on consistent foot traffic, an attractive combination of shops, and good quality tenants. Creating a mix of tenants that complement each other helps to reduce economic volatility and also keep customers’ interest over the long term.
Usually having one or more solid anchor tenants (like a grocery store) in combination with other smaller shops works as a good retail strategy.
Retail center owners must apply improvements and upgrades regularly in order to stay up-to-date with trends, keep customers happy, and stand out from their competitors. It’s a big job, but one that equity REITs are well equipped to conquer.
Key Takeaway:
Retail trends are constantly changing, and property owners need to keep up to ensure profitability.
3. Industrial Properties
Some equity REITs manage industrial properties to ensure efficient storage and distribution of goods. These properties can be anything to do with industrial processes, including:
- Warehouses
- Manufacturing facilities
- Distribution hubs
Warehouses are essential for businesses to store inventory and ensure timely deliveries. Manufacturing facilities are key to the production of goods. Distribution hubs ensure efficient movement of goods, connecting manufacturers to customers and retailers. Access to transportation networks is also crucial for timely delivery.
Industrial properties play an important role in e-commerce and logistics. They are essential for e-commerce retailers to deliver goods to their customers on time and within budget.
In today’s e-commerce era, these assets are essential for meeting the increasing demand for rapid and efficient logistics. It’s interesting to see how logistics is shaping the future of commerce and affecting the retail sector too.
Key Takeaway:
They usually have longer lease terms, which can secure a stable income for investors.
4. Multi-Family Residences
Managing a multi-family, high-rise apartment block or residential complex can be a tough job. Equity REITs responsible for managing these properties need to keep on top of maintenance and security, sometimes complex tenant relations, and often onerous compliance measures.
Despite this, multi-family residences are attractive to equity REITs due to their long-term cashflow potential from rentals.
One of the biggest challenges for this property type is ensuring consistent occupancy rates. Regular tenant turnover is not only time-consuming, but always poses vacancy risks. One vacant apartment over a long period can negatively affect revenue.
To maintain high occupancy, it’s important to have a strategic approach including competitive rental pricing, attractive amenities, and effective marketing.
Features such as fitness centers, common areas, and pet friendly policies help tenants to feel at home. These aspects are especially important in today’s market. When tenants think about their rental as a home, they will stay for a long time, creating stable income for the REIT.
Key Takeaway:
Rent stabilization and demand can affect returns, making it essential for investors to know the local housing market.
5. Hotels and Resorts
Some equity REITs specialize in development, acquisition, and management of hotels and resorts. They might operate a diverse portfolio of properties across various segments, from luxury to more budget-friendly options like motels. Catering to different segments of the market spreads the risk.
Location is a key factor for REITs specializing in hospitality. Hospitality properties are mostly located in popular tourist destinations or major business hubs.
Branding is also important. Many hospitality-focused REITs enter strategic partnerships with established hotel brands. This allows them to take advantage of the existing brand awareness and reputation of well-established hotel chains.
Equity REITs might also partner with travel agencies, booking platforms, airlines, and tour operators, to increase occupancy and revenue.
The challenge with hospitality properties is the seasonal fluctuation of demand. They can also be affected by economic downturns which cause would-be travelers to trim their budgets. A severe weather event could also negatively affect the hospitality sector of the local area.
Despite these risks, however, hotels and resorts can offer a high reward for investors.
Key Takeaway:
Highly sensitive to economic cycles but can be profitable.
6. Healthcare Facilities
Another asset type managed by equity REITs, is healthcare facilities, including hospitals, nursing homes, and assisted living centers.
Healthcare facilities are vital for a country’s healthcare infrastructure. Equity REITs manage them under strict regulatory compliance. They usually invest in healthcare facilities through long-term contracts with service providers, ensuring stable revenue streams.
These facilities are resistant to economic downturns as healthcare is a constant need. This makes them attractive for investors seeking consistent returns. They also support the broader healthcare system and contribute to community well-being. In this way, they can be attractive for socially conscious investors looking for financial stability.
Key Takeaway:
Stable demand but high operational requirements can impact profitability.
7. Data Centers
The digital age has led to a surge in demand for data storage and management. Fueled by changing work habits and the growth of cloud-based technologies, data centers have arisen as a new building typology over the last few years.
Now with the rise of AI, demand for data centers will only increase.
Data centers are equipped with the latest security, systems, and technology, ensuring data safety and smooth operations. Modern data centers' scalability allows for rapid expansion, meeting the needs of a growing client base.
As for income, long-term leases provide a steady income stream and protect REITs from market fluctuations, making data centers a solid investment option which also meets future demands.
Key Takeaway:
Consistent demand, yet high costs and location sensitivity can affect returns.
8. Self-Storage Units
Self-storage units managed by Equity REITs are a growing sector in CRE. REITs understand the importance of vital factors in the acquisition and management of self-storage assets.
Here’s a short overview of those factors:
Location
The strategic location of self-storage facilities is often the most important factor for clients. Self-storage facilities need to be close to homes and easy to access.
Security
Security measures are another important factor. High-tech surveillance and controlled access are a necessity to keep stored items safe.
Demand
Consumer demand for self-storage units has remained strong due to various life events such as:
- Relocating
- Downsizing
- Simply needing more space
This constant demand has made the self-storage industry resilient and appealing to investors looking for stable returns.
A few other key advantages of self-storage assets managed by equity REITs include:
- Their ability to generate consistent, low-overhead income streams
- Minimal operating expenses compared to other forms of CRE
Key Takeaway:
High demand but location is key.
9. Specialized Real Estate
Specialized real estate involves a variety of asset types, including:
- Farmlands
- Timberlands
- Outdoor advertising spaces
- Solar and renewable energy facilities
- And more
These niche investment options naturally have limited market appeal but there are benefits to be gained. Farmlands provide stable income streams but are subject to commodity price volatility and weather conditions. Timberlands offer potential long-term growth but require patience.
Outdoor advertising spaces generate consistent rental income but are highly dependent on local demand and regulations. Solar and renewable energy facilities have the potential for stable, long-term income through lease agreements. They may also be susceptible to regulatory changes such as government incentives for renewable energy.
Some of the risks involved in these non-mainstream sectors include:
- Unpredictability of agricultural and timber markets
- Regulatory changes affecting outdoor advertising
- Limited liquidity
- Economic downturns
- Natural disasters
Additionally, they require specific expertise. This makes them less accessible to average investors. However, some REITs have developed specialized knowledge to tackle these property types. And for those willing to venture out, there could be enticing rewards. Be sure to do thorough research first!
Key Takeaway:
Niche focus can offer resilience but requires specific expertise.
Final Thoughts on Equity REIT Asset Types
The key benefit of an equity REIT is that as an investor, you can enjoy financial returns without the complexities and risks associated with holding your own CRE assets.
While the allure of passive income without the headaches of direct property ownership is strong, it's essential to recognize that this is merely the starting point of your CRE investment journey.
We recommend that you conduct comprehensive research and consider consulting a professional CRE broker to guide you through the complexities of this investment landscape. CRE location insights platforms like AlphaMap can also assist you with getting the analytical data you need to make informed decisions.
One thing is for sure, with the right strategy and understanding, equity REITs can open doors to a diversified and profitable CRE portfolio.
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