After a rough rate cycle, commercial real estate REITs are once again looking more interesting.
Public REITs entered the year with cheaper valuations, their income yields looking more attractive than those available across much of the private-market property sector.
REIT prices are recovering partly because the underlying businesses are still producing income and partly because investors are bargain-hunting after a selloff.
According to Nareit’s industry tracker:
- 65% of REITs reported year-over-year FFO increases
- Total FFO rose 14.8%
- Same-store NOI rose 3.8%
- All-equity REIT occupancy stood at 93.2%
The strongest (and weakest) REIT sectors right now
Data centers and healthcare REITs are the clearest winners because of strong demand for both AI-driven computing capacity and senior housing or medical space.
Industrial is still fundamentally sound, though growth has cooled from the pandemic-era boom.
Some retail segments unexpectedly performed better, but office REITs still trade at deep discounts.
STRONG: Data center REITs
Data center REITs are strong because demand is growing faster than new high-quality supply can come online.
The best sites are hard to replicate because they require large power allocations and specialized infrastructure, which gives major operators more pricing power.
The risk is that investors have already bid up many data center REITs, so future AFFO growth needs to be strong enough to justify those higher valuations.
STRONG: Healthcare REITs
Demographic demand (including more older adults needing assisted living and memory care) continues to fill more senior housing units.
Meanwhile, medical office buildings are less tied to the remote-work problem that affects traditional offices because healthcare tenants still need treatment areas and patient-facing locations.
The main risk in this REIT segment is the tenant’s ability to keep paying rent.
Senior housing operators have to pay high staffing costs; if wage growth and reimbursement pressure eat into their cash flow, the REIT may have to accept weaker rent increases or renegotiate leases.
STRONG: Industrial REITs
The post-pandemic warehouse boom has cooled, but industrial REITs are still in a better position than many other property sectors.
E-commerce and logistics demand still help landlords near major population centers.
That said, vacancy has risen in some markets, and rent growth has slowed from the 2021–2022 peak.
So before buying an industrial REIT, check whether it is still keeping warehouses full and renewing leases at higher rents.
Don’t pay a premium valuation if leasing has slowed.
MIXED: Retail REITs
Retail REITs are beating low expectations.
Well-located centers with strong anchor tenants and limited nearby supply are still drawing steady foot traffic and giving landlords more negotiating power at renewal.
Grocery-anchored centers and top-tier malls are also performing better than weaker secondary retail.
The appeal might be coming from scarcity.
Developers have built very little new retail space in the last few years, so landlords with good locations are now able to push rents when leases roll.
WEAK: Office REITs
Office REITs are still trading at steep discounts largely because investors don’t trust that the sector is truly recovering.
Hybrid work has certainly cut demand for traditional office spaces.
Tenants are also concentrating in newer Class A buildings, forcing older assets to spend heavily on renovations just to stay in the running.
If you want to invest in office REITs right now, focus only on landlords with prime buildings and manageable debt maturities.
Not everything trading below fair value is a bargain.
What should you compare before buying commercial real estate REITs?
Look past the dividends
Did you know that a higher dividend yield doesn’t always mean that the REIT is a safer buy?
In fact, it could indicate that investors expect trouble: sometimes the yield rises because the share price has fallen, which can signal that investors are worried about weaker cash flow and/or a future dividend cut.
It’s more prudent to decide based on whether the REIT can realistically fund that dividend from property cash flow.
Look at:
- Dividend coverage: Is the payout covered by FFO or AFFO?
- Occupancy: Are the properties staying leased?
Then check the direction of the business. A REIT with a 3% yield and rising FFO may be less risky than a REIT with an 8% yield but weakening cash flow.
Check the rate risk before you check the yield
Debt schedule:
How much of the RETI’s debt will mature soon?
Check whether the REIT can refinance that debt without the higher interest costs eating up too much of its cash flow.
Inflation:
REITs with strong tenant demand can often raise rents enough to cover higher costs brought about by inflation, but REITs with weaker tenants and/or long leases often don’t have that flexibility, so these added expenses eat into their income.
Rate sensitivity:
Will the REIT still look good if rates don’t fall soon?
If the answer is no, don’t buy it just because the yield looks high.
You may be betting on rate cuts instead of buying a solid income stock.
Remember: Discounted REITs are not automatically bargains
What is the market worried about? Ask this before buying.
For office and hotel REITs, there’s a palpable risk that earnings could stay weak for years.
In these cases, a low price/fair value ratio may only tell you the stock is cheap relative to its estimated value. It doesn’t prove that recovery is close.
The opposite is the problem for data center REITs. The growth case is strong in these segments, but many investors already know that.
So if leasing slows down or power-constrained projects take a lot longer to complete, highly priced names can fall even if the business remains healthy.
For retail and industrial REITs, the most important thing to do is to check the quality of the locations.
