With the U.S. economy chugging along, commercial real estate investment trusts and sector-related exchange traded funds may be in a sweet spot.
The current economic expansion rate could is robust enough to fuel tenant and investor demand for property but not so overpowering that it could fuel speculative investments and overheat the market, writes Andrew J. Nelson is Chief Economist at USA for Colliers International, for CNBC.
All the right factors are fueling property demand. For instance, the housing market is recovering as home sales, housing starts and pricing are steadily on the rise. The jobs market is expanding, with more gains in 2014 than any year this century. More Americans are earning, cutting down debt and spending more. Additionally, the credit markets are in good standing, with rates and inflation both low.
“All of these factors are driving demand for all types of real estate, which means absorption is strong and growing for all sectors, even if it is below long-term averages, especially for a growth period,” Nelson said.
Consequently, investors who want some exposure to the commercial REITs space can consider a broad, diversified ETF option, such as the Vanguard REIT ETF (NYSEArca: VNQ), iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR), SPDR Dow Jones REIT ETF (NYSEArca: RWR) and Schwab US REIT ETF (NYSEArca: SCHH).
The REITs ETFs include exposure to various sub-sectors including, diversified REITs, healthcare REITs, hotel & resort REITs, industrial REITs, office REITs, residential REITs, retail REITs and specialized REITs.
Looking ahead, Nelson argues that the best years are yet to come, pointing to below-peak-level occupancy rates and rents. Additionally, recent gains in REITs are below the level required to support new construction. Consequently, we could see more good years for property markets as rising property demand helps lift occupancy and rents for existing properties.
However, there are some potential risks. A slowdown overseas, along with a surging U.S. dollar, could hurt U.S. exports. Geopolitical turmoil could trigger short-term volatility. An end to the Federal Reserve’s loose monetary policies could also slow growth. [Fundamentals to Support REIT ETFs, Outweighing Rate Risk]
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.