The 13 Types of REIT Stocks & How to Invest in Them
By: Olivia Faucher,
The “13 Types of REIT Stocks and How to Invest in Them” offers important insights for potential REIT investors.
REIT stocks can be classified into 13 different sectors that are differentiated by the type of properties held. REITs typically focus on one type of real estate, and results show various sectors perform differently.
It is valuable for investors to understand the differences among the varying types of REITs. This article will detail the 13 categories of REITs, along with important information about each kind.
Read below to learn about the recent performance of each sector, important nuances by sector, how to invest in REIT stocks, and more.
13 Types of REIT Stocks — #1: Office
- Number of Publicly Traded Office REITs: 21
- Year-to-date (YTD) total return of the Office REIT sector as of 12/31/2020: –18.1%
Office REITs focus specifically on office real estate. Office REITs own, manage or develop office buildings. The properties held by office REITs range from skyscrapers to office parks with many types of properties in between. Office REITs may choose to focus on specific markets, such as urban business hubs or suburban areas. Another common strategy is for office REITs to focus on specific groups of tenants, such as tech firms or government agencies.
The Office REIT sector has struggled throughout the coronavirus pandemic, as long-term work from home policies have diminished the need for office space and some tenants have stopped paying their rent, asked for rent relief, or have gone out of business. The shift to remote work has not only decreased the demand for new office space, but it also has resulted in an increased risk of lease non-renewal, as companies realize that rent is a cost that can be cut for the foreseeable future.
Large office REITs include Alexandria Real Estate Properties, Inc (NYSE: ARE), Boston Properties, Inc (NYSE: BXP) and SL Green Realty Corporation (NYSE: SLG).
13 Types of REIT Stocks — #2: Industrial
- Number of Publicly Traded Industrial REITs: 14
- YTD total return of the Industrial REIT sector as of 12/31/2020: 18.2%
Industrial REITs own and operate properties that are used for manufacturing, production, storage and distribution of goods. Such properties include factories, distribution centers, warehouses and e-commerce fulfillment centers. Generally, these industrial properties are located outside of cities because their operations require a lot of space.
Industrial REITs play a central role in helping to meet the demand for rapid delivery of goods. Therefore, the e-commerce boom over recent years has been largely beneficial to the industrial REIT sector. As the number of online shoppers grows rapidly, companies with e-commerce capabilities must set up warehouses and fulfillment centers.
Industrial REITs are an advantageous investment because they are highly adaptable. Industrial REITs are not too sensitive to changes in the economic environment. Industrial REIT properties can meet demands at any time during an economic cycle, as the floor space can be converted to serve varying purposes.
Industrial REITs have done well throughout the pandemic, as one of the only REIT sectors to deliver positive returns. This positive performance can be attributed to the widespread increase in online shipping
Large-cap industrial REITs include Duke Realty Corporation (NYSE: DRE), STAG Industrial, Inc (NYSE: STAG) and Monmouth Real Estate Investment Corporation (NYSE: MNR).
13 Types of REIT Stocks — #3: Retail
- Number of Publicly Traded Industrial REITs: 39
- YTD total return of the Retail REIT sector as of 12/31/2020: –29.5%
Retail REITs own and manage retail properties, and rent the retail space to tenants. Most retail REITs choose to specialize in a specific type of retail property. For instance, some retail REITs own shopping malls, while others own single-tenant properties. Yet others may own outlet centers or grocery stores.Retail REITs can encounter varying risk levels due to the fact that there are many different types of retail businesses that may occupy the properties. There are two main factors that affect the performance of retail REITs: the economic sensitivity of the tenants and the implications of e-commerce on the tenants.
The economic cycle affects different kinds of retail businesses in different ways. For example, stores that sell consumer staples products still do okay during recessions since consumers need to buy those products. On the other hand, retail stores that fall into the consumer discretionary category suffer during recessions since consumers can live without such products.
In terms of the consequences of e-commerce, many classic brick and mortar stores have suffered from the increase in online shopping. However, there are three types of retail stores that are well protected against disruptions from e-commerce. These are: stores that sell things people need quickly (such as drug stores), businesses that sell things at a higher discount than can be found online and companies that primarily sell a service (such as an automotive repair shop).
Retail REITs have been among the most negatively impacted sectors of real estate throughout the coronavirus pandemic. The public health crisis has resulted in mandated store closures, physical distancing requirements and tenant bankruptcies. The operations of retail REITs have been heavily disrupted.
The retail REIT sector is relatively large, containing 39 publicly traded REITs. The following three REITs each focus on a different type of retail property: Simon Property Group (NYSE: SPG) features malls, Realty Income Corporation (NYSE: O) owns single-tenant retail properties and Acadia Realty Trust (NYSE: AKR) invests in shopping centers.
13 Types of REIT Stocks — #4: Residential
- Number of Publicly Traded Residential REITs: 22
- YTD total return of the Residential REIT sector as of 12/31/2020: 20%
Residential REITs own and operate various types of living spaces, and rent out the space to tenants. Residential REITs specialize in types of residences such as apartment buildings, single-family homes, manufactured homes and student housing. Oftentimes, residential REITs focus on a geographical location, type of property, or demographic of potential tenants.
Residential REITs face the risk of holding an oversupply of rental properties relative to the demand for such properties. There is an additional risk associated with the housing market, as the higher the homeownership rate rises, the less demand there is for rental properties.
Some residential REITs have done better than others throughout the pandemic, depending on the kind of residential real estate held by the REIT. The pandemic sparked multiple shifts in the real estate market. There has been a large shift from urban to suburban living, as many people are seeing the appeal of the suburbs amid the pandemic. People are seeking larger homes with more space to work from home. REITs with primarily suburban portfolios have held a competitive advantage over urban portfolios with less space. The demand for single-family rental homes has also surged as a result of the pandemic. Many Americans are realizing that they will be working and studying from home for the foreseeable future, so people want to buy nice homes in great neighborhoods.
The following residential REITs each specialize in different types of properties: Bluerock Residential Growth REIT (AMEX: BRG) focuses on apartments, Front Yard Residential Corporation (NYSE: RESI) rents out single-family homes, and Sun Communities, Inc. (NYSE: SUI) features manufactured homes.
13 Types of REIT Stocks #5: Hotels/Resorts
- Number of Publicly Traded Hotel REITs: 17
- YTD total return of the Hotel REIT sector as of 12/31/2020: -37.3%
Hotel REITs own and manage hospitality properties such as hotels and resorts. Some hotel REITs invest in a variety of hospitality properties, making it possible for them to serve a wide variety of customers from vacationers to business travelers. Some hotel REITs take another approach, choosing to specialize in one type of property. For example, a hotel REIT may only focus on the luxury market.
The hotel industry is very cyclical and highly sensitive to changes in the economy. When the economy suffers and consumers need to cut costs, vacations and unnecessary travel are among the first things to be cut. Additionally, the coronavirus pandemic has taken a toll on the hotel industry, as travel has diminished immensely.
Large hotel REITs include Apple Hospitality REIT, Inc. (NYSE: APLE), Host Hotels and Resorts, Inc. (NASDAQ: HST) and Sunstone Hotel Investors, Inc. (NYSE: SHO).
13 Types of REIT Stocks #6: Self Storage
- Number of Publicly Traded Self Storage REITs: 6
- YTD total return of the Self Storage REIT sector as of 12/31/2020: 10.7%
Self-storage REITs own and operate storage facilities. Storage REITs rent space to both individuals and to businesses. Storage is a relatively small REIT subsector, with only six publicly traded self-storage REITs.
Self-storage REITs have had a few challenging years recently, but throughout 2020 the sector has performed well. Self-storage REITs are typically regarded as a smart long-term investment.
The coronavirus pandemic has not been a significant disruption for the self-storage sector. Self storage is considered one of the most resilient asset classes. Self-storage occupancy levels have remained relatively consistent this year due to lower-than-normal move-in and move-out activity.
Widely known storage REITs are Public Storage (NYSE: PSA), Extra Space Storage Inc. (NYSE: EXR) and CubeSmart (NYSE: CUBE).
13 Types of REIT Stocks #7: Health Care
- Number of Publicly Traded Health Care REITs: 17
- YTD total return of the Health Care REIT sector as of 12/31/2020: -9.3%
Health Care REITs own and manage health care-related real estate. Health care real estate is a broad term that includes multiple types of properties such as hospitals, medical offices, senior living facilities, life science offices and wellness centers.
It is important to note that some health care REITs do not use the classic landlord-tenant model with every property. It is common for senior housing, assisted living and skilled nursing facilities to be operated as partnerships. In this case, the REIT and the facility’s operator both get a share of the business’s operating profits.
Health care REITs can be a smart investment because the sector is resilient against recessions. Health care is non-negotiable; people need health care even when the economy is suffering.
Plus, health care is an especially good investment now because of demographic trends in the United States. The 65+ age group is growing quickly, and this population uses health care facilities far more than other age groups. The demand for health care real estate is increasing in correlation with the rising need for health care as the older population ages further.
Health care REITs have had a tough year due to the pandemic, and certain health care properties performed more weakly than others. Nursing homes and assisted living facilities are facing record-low occupancy rates, and therefore those properties have struggled. However, REITs that hold medical office buildings and hospitals have fared better. The widespread adoption of telemedicine also can be expected to have an impact on health care real estate in the coming years.
Large health care REITs include Welltower, Inc. (NYSE: WELL), Healthpeak Properties, Inc. (NYSE: PEAK) and Omega Healthcare Investors, Inc. (NYSE: OHI).
13 Types of REIT Stocks #8: Timber
- Number of Publicly Traded Timber REITs: 4
- YTD total return of the Timber REIT sector as of 12/31/2020: 3.4%
Timber REITs, otherwise known as Timberland REITs, own and operate land that is used for the production and harvesting of timber. They make most of their money by selling raw timber, wood-based products, or refined wood.
It may come as a surprise that timber is a highly cyclical industry. Timber REITs are highly sensitive to changes in the economy. Additionally, timber REITs do not have much guaranteed income like most other REITs. The income earned by timber REITs is based on market prices and industry demand. Most of the demand is correlated with the housing industry, which is known for being cyclical.
Timber REITs have not been significantly impacted by the coronavirus pandemic in one way or another. Rather, timber REITs have performed steadily and have not produced significant negative or positive returns.
Timber is a small sector, with only four publicly traded timber REITs. The four timber REITs are CatchMark Timber Trust, Inc. (NYSE: CTT), Weyerhaeuser Company (NYSE: WY), PotlatchDeltic Corporation (NASDAQ: PCH) and Rayonier Inc. (NYSE: RYN).
13 Types of REIT Stocks #9: Infrastructure
- Number of Publicly Traded Infrastructure REITs: 6
- YTD total return of the Infrastructure REIT sector as of 12/31/2020: 0.4%
Infrastructure REITs operate and own real estate which pertains to infrastructure. Examples of infrastructure real estate include fiber cables, wireless infrastructure, telecommunications towers and energy pipelines.
Some infrastructure REITs strictly invest in domestic real estate assets, while others invest globally. U.S.-based assets are typically safer and easier to predict, but international investments can offer far more growth potential.
It is important for investors to know that the types of industries that lease properties from infrastructure REITs are highly regulated, and these regulations can work against REITs, or in favor of them. For example, some regulations may be very costly to implement, but other regulations may give REITs strong pricing power and tenant retention.
Wireless infrastructure in particular has fared well during the coronavirus pandemic, as the demand for mobile data is growing rapidly. Additionally, communications towers generate steady rental revenue with long-term leases, making them somewhat resistant to recessions.
Large infrastructure REITs include American Tower Corporation (NYSE: AMT), Crown Castle International Corp (NYSE: CCI) and SBA Communications Corp. (NASDAQ: SBAC).
13 Types of REIT Stocks #10: Data Centers
- Number of Publicly Traded Data Center REITs: 5
- YTD total return of the Data Centers REIT sector as of 12/31/2020: 18.8%
Data centers are facilities that provide a secure and reliable environment for customers to house servers and data. Data centers offer a range of products and services to ensure that the environment is secure, including uninterruptible power supplies, air-cooled chillers and physical security.
As technology advances and becomes increasingly more prominent in everyday life, the need for secure and reliable data storage has skyrocketed. Data center REITs are a smart investment because they provide a service that is becoming more and more essential.
Data centers have been the best-performing sector of real estate throughout the pandemic. There is an increased demand for the services provided by data centers as corporations shift spending from physical office space to digital investments that will be beneficial during the remote work era.
Three large data center REITs are Equinix, Inc. (NASDAQ: EQIX), Digital Realty Trust, Inc. (NYSE: DLR) and CyrusOne, Inc. (NASDAQ: CONE).
13 Types of REIT Stocks #11: Diversified
- Number of Publicly Traded Diversified REITs: 19
- YTD total return of the Diversified REIT sector as of 12/31/2020: -14.1%
Diversified REITs own and operate a mix of different properties. For example, a diversified REIT might own industrial, retail and health care properties.
Diversified REITs offer a great way to invest in multiple types of real estate at once. Diversified REITs also mitigate the risks associated with specific property types, as the REIT still has the potential to perform well even when one of its property types isn’t producing much income. The potential pitfalls of diversified REITs varies by individual REIT, and depends on the properties in a given REIT’s portfolio.
The coronavirus pandemic has been highly impactful for the diversified REIT subsector. Diversified REITs have seen double-digit negative returns throughout the majority of the pandemic.
Some examples of diversified REITs are W. P. Carey Inc (NYSE: WPC), VEREIT, Inc. (NYSE: VER) and Vornado Realty Trust (NYSE: VNO).
13 Types of REIT Stocks #12: Specialty
- Number of Publicly Traded Specialty REITs: 11
- YTD total return of the Specialty REIT sector as of 12/31/2020: 23.1%
Specialty REITs meet all of the REIT qualifications, but they do not own properties that fit one of the traditional REIT categories. For example, specialty REITs may own movie theaters, casinos, farmland and outdoor advertising sites.
Specialty REITs cover a wide range of property types, so it’s impossible to identify universal risks for specialty REITs. For instance, a REIT that owns farmland would have a completely different risk profile than one that owns movie theaters. The risks are relative to the properties within the specialty REIT’s portfolio.
Specialty REITs have also experienced negative double-digit returns throughout most of the pandemic. These negative returns reflect an increase in expenses and a simultaneous decrease in revenues.
Specialty REITs include VICI Properties Inc (NYSE: VICI), Iron Mountain, Inc. (NYSE: IRM) and Gaming and Leisure Properties, Inc. (NASDAQ: GLPI).
13 Types of REIT Stocks #13: Mortgage
- Number of Publicly Traded Mortgage REITs: 41
Mortgage REITs (mREITS) are different from the previous 12 REIT sectors because mortgage REITs do not actually own any properties. Instead, mREITs provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities (MBS), and earning income from the interest on these investments.
mREITs generally focus on either the commercial or residential mortgage markets, but there are some mREITs that invest in both residential MBS and commercial MBS. Plus, mREITs provide liquidity that is essential for the real estate market.
The biggest risk associated with mREITs is that fluctuations in interest rates affect the net interest margin, which is the mREITs primary source of income.
mREITs were particularly hard hit in the beginning of the pandemic, taking a huge hit in February and March. mREITs faced a liquidity crisis as a result of the extreme market turmoil in the beginning of the pandemic. Since then, most mREITs have been able to rebound and have delivered a considerably better return.
Mortgage REITs include Annaly Capital Management, Inc. (NYSE: NLY), AGNC Investment Corp. (NASDAQ: AGNC) and New Residential Investment Corp. (NYSE: NRZ).
How to Invest in REIT Stocks
All 13 REIT sub sectors follow the same investment process. Shares of publicly traded REITs can be bought and sold on major public exchanges, the exact same way that any equity stock is bought and sold. All of the REITs mentioned above are publicly traded.
Investors can also invest in public REITs through a REIT mutual fund or a REIT ETF.
There are privately held REITs that can also be purchased, however investing in them is more complicated than buying shares in publicly traded REITs. Privately held REITs generally are limited to individuals and institutions who meet certain financial criteria.
Mainstream, everyday investors simply invest in public REITs on major exchanges, either by purchasing shares, or by investing in a REIT mutual fund or REIT ETF.
Want more? Read our related articles:
The Ultimate Guide to Investing in REITs
Why Do REITs Have High Dividend Payout Ratios?
Investing in REITs: Pros and Cons
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