Most real estate investment trust (REIT) sectors posted modest growth last year, while some REITs separated from the crowd with stellar gains. Industrial, information, and infrastructure REITs dominated 2017, but new sectors are emerging as top players in 2018.
- REITs averaged overall returns of 9.3% in 2017
- Infrastructure REITs posted the most growth of 35.4%
- Single-family and retail REITs will emerge as top sectors in 2018
These three publicly-traded REIT sectors dominated last year: infrastructure (cell tower), information (data centers), and industrial. Infrastructure REITS posted the highest returns of 35.4% last year; information REITs were second with 28.4% growth, and industrial REITs were third with 20.6%. All three sectors more than doubled the average return for all REITS of 9.3%, according to the Nareit All REITs Index.
Industrial REITs will continue growing in 2018 after a massive boost from the growing e-commerce industry, according to Brad Case, senior vice president of research with Nareit. “Industrial real estate has been around forever and it’s been professionally managed for a long time, but investors became aware in 2017 of the fact that the growth of e-commerce was going to result in a tremendous increase in the demand for industrial space,” he says.
Infrastructure and information sectors will maintain pace next year. Both sectors are attracting plenty of investors from information technology companies. Deutsche Bank picked information REITs as the best sector, thanks to a booming expansion from data centers globally.
New REIT sectors, like single-family and retail, are also expected to post above-average returns in 2018. Deutsche Bank predicts single-family REITs will post exceptional returns, alongside information and industrial.
The retail REIT sector is poised to rebound after investors overreacted to a series of brick-and-mortar retail store closing over the past year. “Retail during 2017 was so beaten down, and there isn’t really much reason for that…,” Case explains. “Investors have really overreacted to the effect of the growth of e-commerce on REIT-owned properties.”
These flourishing REIT sectors will sustain their impressive growth, but REITs as a whole will remain relatively muted. “There will be further divergence this year between REIT sectors, as well as the specific stocks within the sectors,” says Matt Werner, managing director at investment advisory firm Chilton Capital Management LLC.
“Hopefully, investors are attracted to the strong fundamentals that continue to do well for commercial real estate. But if investors think that they’re going to get another 20 percent from the S&P 500 this year, then REITs may struggle,” Werner warns.