Build(ings) for the long term

M1 Team
M1 Team February 27, 2024

Publicly traded real estate investment trusts (REITs) are companies that hold portfolios of various types of real estate. And just like traditional real estate investing, REITs can be vulnerable to the up and down swings of the market. 

For example, REITs focused on the retail and hospitality sectors ended the year on the positive side as consumers flocked to malls and traveled extensively in 2023. The top five retail REITs (based on market cap) gained 8%, while hospitality REITs soared over 20%. On the other side, commercial real estate continued to get crushed as landlords lose tenants to remote work, leading some to even walk away from their mortgages and hand the keys back to the bank.  So just like any other stock or ETF, it’s vital to do your due diligence before investing in a REIT. 

Here are some things to know about REITs, how they fared last year, and what to potentially expect in 2024. 

How does a REIT work? 

REITs hold real estate assets, including income-generating residential housing, commercial properties, hotels and more. The portfolio of properties held by the trust can typically be found on the fund’s website. But what may be appealing for many is the ability to access a large portfolio of potentially cash-flow positive real estate, along with possible financial upsides. 

REITs are required to disburse at least 90% of their yearly taxable income to shareholders in the form of dividends, making them attractive for some investors. By investing in REITs, you can aim to be as diversified or as focused on specific real estate ventures as you’d like. And they cover a wide variety of real estate, from industries as different as private prisons to hospital chains. 

Here are how a few REITs performed in 2024 and what kind of payouts shareholders received. All figures are as of February 21, 2024; note that past performance does not indicate future performance. 

Retail REITs 

Retail REITs largely focus on properties like shopping malls, outlets, and strip malls with big box retailers to name a few. These specific REITs have had significant volatility in the last few years, largely caused by the pandemic and some consumers continuing to move their shopping habits online.  

Despite these bumps in the road, a few retail REITs soared for shareholders last year as demand for in-person shopping surged back at malls and outlets.  

Here are a few examples from 2023: 

SKT (Tanger Inc. focuses on upscale outlets malls) 

  • 2023: up 56% 
  • Current dividend yield: 3.60% 

WSR (Whitestone, focuses on retail and office/flex properties) 

  • 2023: up 27% 
  • Current dividend yield: 3.92% 

O (Realty Income Corp, focuses on single-tenant, triple-net-leased retail properties) 

  • 2023: down 10% 
  • Current dividend yield: 5.87% 

SRRTF (Slate Grocery, focuses on retail grocery stores) 

  • 2023: down 18% 
  • Current dividend yield: 9.68% 

Some retail REITs struggled as interest rates remained elevated along with skyrocketing construction costs. However,  CBRE Group, a commercial real estate services firm, sees brighter days ahead in 2024. The American mall is still alive and well as more project completions are scheduled this year than the prior year, according to CBRE, and consumer spending remains strong.  

Residential REITs 

Residential REITs are exactly as they sound: they are trusts that own a large amount of leased residential real estate like a portfolio of homes or apartment buildings. These give investors the opportunity to be part of a large portfolio of properties of the one thing we may need: shelter. 

At the time of writing, interest rates on home mortgages remain at highs not seen since 2008. The number of homes for sale is close to a five-year low. And, depressingly, housing affordability remains near an all-time low. But instead of investors waiting on the sidelines for economic improvement, they may consider investing in a REIT — although REITs are similarly vulnerable to real estate market fluctuations. 

Here’s how some of the larger residential REITs performed in 2023: 

AVB (AvalonBay Communities, owns and manages 276 apartment communities with over 82,000 units) 

  • 2023: up nearly 16%
  • Current dividend yield: 3.91% 

EQR (Equity Residential, owns and manages 305 properties with over 80,000 apartment units) 

  • 2023: up 4% 
  • Current dividend yield: 4.49% 

SUI (Sun Communities, focuses on owning manufactured housing, residential vehicle communities, and marinas) 

  • 2023: down 4% 
  • Current dividend yield: 2.83% 

INVH (Invitation Homes, nearly 83,000 single-family rental homes) 

  • 2023: up 16% 
  • Current dividend yield: 3.37% 

More apartments are expected to come onto the market in 2024, giving REITs the opportunity to acquire even more properties to hold in their portfolios. 

Healthcare REITs 

Healthcare investment trusts include not just hospitals, but also healthcare-related facilities like medical office buildings, senior housing, and skilled nursing facilities. And healthcare demand and costs only continue to rise. In 2022, Americans spent a whopping $4.5 trillion on healthcare related costs — averaging out to roughly $13,000 per person. Moreover, the American population is aging at a rapid rate. In 2030, for the first time in US history, people aged at least 65 years are expected to outnumber those under the age of 18, according to US Census Bureau projections. And according to S&P Global Market Intelligence, this is expected to be a “tailwind” for the industry and possibly drive up the value of the real estate assets held by REITs. 

However, the healthcare sector faces similar challenges to the other types of REITs mentioned above. Notably, Medical Property Trust (MPW) stock price tanked a whopping 57% last year due to tenants not paying on leases and overleveraging to acquire distressed properties. As always, it’s important to do your own due diligence. 

Here’s how a few healthcare REITs performed in 2023: 

CHCT (Community Healthcare Trust, owns and acquires, properties leased to hospitals, doctors, healthcare systems or other healthcare service providers) 

  • 2023: down 26% 
  • Current dividend yield: 6.80% 

CTRE (CareTrust, purchasing and management of skilled nursing homes, senior housing and other healthcare-related properties) 

  • 2023: up 19% 
  • Current dividend yield: 4.85% 

VTR (Ventas: Runs ownership and management of research, medicine and healthcare facilities in the U.S., Canada and the United Kingdom) 

  • 2023: up nearly 10% 
  • Current dividend yield: 4.17% 

Office/Commercial REITs 

The barreling economic crisis that some analysts are warning about is the mounting commercial real estate mortgages that are coming due. Approximately $2.2 trillion is coming to maturity before 2028, and with values plummeting in the nine figures, we could have a serious problem on our hands. 

But why is this happening? Well, look at your typical city center now. You’ll likely see far fewer people around, and many of the offices once filled with people are now empty. In San Francisco alone, it’s estimated that over 150,000 workers have stopped coming into the city – and one-third of the city’s offices sit vacant. Despite having no tenants in the building, those landlords still must pay their respective mortgages. But without rental income, and with the property value plummeting, many owners have decided to hand the property over to the bank and simply walk away

According to research from Capital Economics, commercial real estate lost around $590 billion last year. REITs focused on office buildings appear to be feeling that pain.  

Here’s how this looming “urban doom loop” may have affected specific office REITs last year: 

OPI (Office Properties Income Trust, property portfolio is mainly composed of single-tenant office buildings, as well as multitenant properties) 

  • 2023: down 49% 
  • Last five years: down 90% 
  • Current dividend yield: 1.42% 

CUZ (Cousins Properties, its portfolio primarily comprises offices and mixed-use developments) 

  • 2023: down almost 2% 
  • Last five years: down 39% 
  • Current dividend yield: 5.64% 

Office vacancies just hit another record high in the fourth quarter. It remains unclear what will happen with the outstanding loans on buildings that are rapidly losing value and foot traffic. It will likely take local and state governments to step in to render aid to a possibly disastrous situation. 

The bottom line on REITs 

REITs are just one more avenue you can explore as an investor along your wealth building journey. They can give you exposure to different kinds of real estate that you wouldn’t normally have access to. Additionally, they do come with several potential tax benefits and even dividend payouts possibly, so be sure to analyze which one fits your investing goals. 

Additionally, consider the downsides of REITs, including taxes on dividends, the volatility of interest rates from the Fed, and high fees in some cases. 

Lastly, other diversified real estate assets exist that are publicly traded like VNQ or XLRE. By staying diversified, you may avoid the volatility that can come with real estate investing.