In the last article I went through a couple of reasons why it is that Apartment REITs showed some fantastic returns after the 2009 recession. However, moving forward, we might have seen the best of times already. While this doesn’t necessarily exclude them from future inclusion in our own personal portfolios, I’d like to take some time to discuss how it is that maybe Commercial REITs represent the better long-term investment for a patient investor.
While Commercial REITs would represent a much more aggressive strategy, and would require a great deal more patience, they represent a broad investment into the overall recovery of the economy as a whole.
A Commercial REIT profits by renting out property to stores and businesses. After the recession, Commercial REITs saw some harder times because many of their tenants were going out of business, and therefore no longer paying their rent. Left with so many vacancies, the distributions declined, and the equity value decreased. However, the companies still benefitted from decreasing interest rates on their loans, combined with inflationary protection against the massive stimulus packages implemented by the Federal Reserve.
The end result was, in my opinion, the creation of a long-term value opportunity. While these companies would not see new tenants for the short-term, they would begin to fill their capacity against as the economy recovered. As consumers finally begin spending again, companies will begin expanding their retail outlines, and rent up more space for commercial complexes. This means that Commercial REITs are very likely to increase their distributions in the future, so long as the economy recovers enough to the point at which consumers resume shopping.
At the end of 2011, we saw that consumer spending was slowly-but-surely on the rise, and that corporate profits were fairly good, even though these returns weren’t exactly reflected in the equity prices. To me, this demonstrates two signals. Firstly, consumers are going out shopping. Secondly, companies are in a position to invest in expanding retail outlets to accommodate shopping consumers. The easiest way for companies to expand into these retail outlets is to rent from a Commercial REIT.
This may seem straight-forward enough, but it’s not so easy. The major risks associated with this sort of investment are time-related. Specifically, as personal investors, we are not sophisticated enough to time the market, and are therefore unable to guess how long it will be until we finally see the Commercial REIT distributions begin to increase again. However, if there is to be any kind of material recovery in the consumer markets, these REITs will be reasonably quick to benefit.
Combined with the way in which they still do pay a nominal distribution, and secure the investment with tangible value on the balance sheet, it might be a good idea to sit down with an advisor and talk about how it is that we can begin fitting these REITs into a smaller portion of our more aggressive portfolio, as a long-term investment into the recovery of the economy as a whole.
