How To Choose Commercial Real Estate Stocks?


Commercial real estate investing has been one of the best investment choices for many decades, and there is no question that real estate is a significant investment. Not all commercial real estate investors are interested in buying individual properties or in taking care of their set of investment portfolios individually.

Investing in individual properties can often be a lot to take on as investors need to closely monitor their profits and be cautious about their Investments.

For most prudent investors and are looking for safe investing options – direct commercial real estate investing might not be on the top of the list. Luckily, for such investors – commercial real estate stocks provide the best alternative way to invest in real estate without actually directly involved in funding and breaking head over the right kind of investment and making all decisions all by themselves, including the different forms of financing, the best type of property, and best ways to secure tenants, etc.

Suppose you are a commercial real estate investor who wants to put your money to work in the commercial real estate sector but isn’t particularly interested in buying individual properties. In that case, commercial real estate stocks are the best option for you.

The only challenge in investing in commercial real estate stocks is to pick the right stocks that will help you reap the many benefits of real estate investing without actually having the headache of managing all the properties yourself.

This blog is an overview of how to choose the best commercial real estate stocks out there. Let us first understand what are commercial real estate stocks before knowing how to choose the best ones.

What are Commercial Real Estate Stocks?

Commercial real estate stocks are a type of real estate investment trust or popularly referred to as REITs. These types of real estate stocks buy, own, manage, or finance different types of commercial real estate properties.

REITs generally invest in properties that produce rental income or provide other financing forms like leases to profit from the net interest income. REITs are typically required to pay out at least a majority of 90% of the taxable net income to the investors.

Thus, if you are an investor investing in commercial real estate through REITs, you can rest assured that you will be entitled to 90% of the taxable net income in the form of dividends, which will be paid to you based on the memorandum of the understanding. 

For commercial real estate investors, who want to purchase commercial real estate stocks and make good passive income on the side without going through the headache of choosing the properties by themselves, then CRE stocks is the best way to do that. 

Major CRE assets in which REITs invests

It might be important to understand the different types of hazards where most commercial REITs invest. Some of the major types of assets where commercial REITs invest in are retail spaces, multi-family properties, office spaces, industrial spaces, lodging and healthcare, storage facilities, communications and energy infrastructure, and commercial real estate mortgages.

The new type of investment added to the list is the warehousing and distribution centers investing, which have come into the picture post-pandemic as most of the retail spaces are switching to their online storefronts warehousing facilities.

For investors who want to consider one of the best investing options through REITs, the warehousing and distribution centers might be the best option in 2021. Some of the REITs also invest in residential properties.

Here’s What to Look for in Commercial Real Estate Stocks

Generally speaking, the commercial real estate stock, which is right for you largely depends on your individual investment goals and your risk appetite. While some REITs choose much stable investment options and provide lower dividend yield, others have higher dividends but are subject to large price fluctuations.

Thus, like any other investment, finding a balance between risks and rewards and mapping the same onto your individual financial and investment goals is the key to choosing the best commercial real estate stock software for you.

Thus, it is suggested that you do your research on each REIT company that you are considering for your portfolio before thinking of investing in one. This is the least amount of research you will be expected to do once you decide on the REIT you want to invest in; there is no longer a need for you to do individual property research or market research, for that matter. Ruling out this basic research, here are some basic things to look for in commercial real estate stocks:

#1 – Investment Strategy

Understanding the individual investment strategies deployed by various REITs is detrimental in determining the commercial real estate investing success. If you are concerned that a specific type of asset class will struggle, then investing in that type of REIT is likely to keep you up at night.

Thus, before choosing the REIT, it’s important to look at their investment strategy and understand the properties they typically deal in.

#2 – Past Investments

Looking at the past investments a REIT has made is a good indicator of how they will continue to perform. When you evaluate a real estate stock’s performance, you might want to look at its 52-week range along with its performance over the past three or five years.

Has the value of these past investments trending up, down, or has relatively remained level is something you have to look at while deciding the commercial real estate stock you want to choose.

#3 – Leadership & Experience

What is the demonstrated leadership and experience that the management of the REIT you’re looking at have? Finding an answer to this question is very important to determine how this REIT performs.

As an investor, you are trusting the REIT with your money at the end of the day. All you want to know is to evaluate their investment decisions. Additionally, you might want to consider how diverse is their management and leadership panel in their expertise and experience.

On a general note, having a well-rounded type of expertise and experience across the leadership team is crucial for any REIT to perform well.

#4 – Dividends

One of the major reasons – investors like commercially listed stocks is the factor of dividend. Generally, REITs have higher dividends than many other types of stocks in the market, including equity and debentures markets.

Suppose your primary interest in commercial real estate investing is the dividend income. In that case, you will want to compare the income of the particular property group you are looking at and other types of passive income investments and make your decision accordingly.

#5 – Funds from Operations

The next thing to look at while choosing the commercial real estate stocks is the average funds from operations a particular REIT is generating every year. Try to look at the records to get a full picture of the overall funds from operations that the company has developed in the past and get a brief of the kind of dividends you can expect in the coming years.

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