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Types of REITs (Office, Retail, Logistics)

During COVID, online shopping exploded but offices sat empty. This gap split REIT investors' profits and losses in opposite directions. What types of REITs are there, and why were their results so different?

REITs are also divided by 'what they hold'

REITs are products that hold real estate and trade like stocks. But their character changes completely depending on what real estate they hold.

The U.S. real estate association (Nareit) classifies REITs into more than a dozen sectors, including data centers, health care, industrial (logistics), lodging/resorts, office, residential, retail, self-storage, and telecommunication towers.

Even though they all carry the same name 'REIT,' an office REIT and a logistics REIT are effectively different businesses. So when you invest in a REIT, you should first look at 'what buildings this REIT owns.'

Representative sectors: office, retail, logistics

Office REITs: They own office buildings and lease them to businesses. They are sensitive to the economy and companies' demand for office space.

Retail REITs: They lease retail stores such as shopping malls, department stores, and storefronts. They are swayed by consumer spending and offline shopping trends.

Industrial/logistics REITs: They own warehouses and distribution centers. The more online shopping and delivery demand grows, the more favorable it is for them.

Besides these, there are residential REITs that lease apartments and the like, data center REITs packed with servers, and telecommunication tower REITs that own cell towers. Each sector rides a different economic current.

The winners and losers COVID split apart

In 2020, COVID split REIT performance by sector to extremes.

The winners were logistics, data centers, and telecommunication towers. As people shopped, worked, and consumed online from home, demand for these exploded. According to Nareit data, industrial (logistics) REITs recorded a total return of about +58.6% in 2020.

Conversely, the losers were retail and lodging. Hit directly by store closures and social distancing, retail REITs recorded about -39.7% that same year, and lodging/resort REITs about -53.1%.

So even among the same 'REITs,' one side was +58% and the other was -53%. It's a passage that shows how vague the phrase 'investing in REITs' really is.

The figures above are for a single year, 2020, and based on specific sector indexes. They are merely the result of a particular year and do not predict the future; performance by sector can flip from period to period.

The long winter of office REITs: the shadow of remote work

The sector that struggled the longest after COVID was office. As remote and hybrid work took hold, demand for office space fell.

Office REIT share prices at times traded far below the net asset value (NAV) of their holdings (at one point at an average discount of about 25%), and some analyses say the total market capitalization of U.S. office REITs shrank by more than half between 2019 and 2023.

The lesson this case gives is clear: the risks differ too much by sector to lump them under the one big name 'real estate.' If you invest in a REIT, you must look at the type of buildings it holds together with the trends of that industry.

The discount-rate and market-cap figures are approximate values that change depending on the point in time and the compiling institution. The office market varies widely by region and building grade.

よくある質問

Q. If I just buy one REIT, does that diversify my real estate?

It's hard to feel at ease based on the name 'REIT' alone. A REIT concentrated in one sector (e.g., office) is exposed directly to that industry's risk. In fact, after COVID the performance of logistics REITs and office REITs was the opposite. You get a greater diversification effect from a REIT with diverse sectors, or by spreading across several sectors.

Q. Logistics REITs rose during COVID, so will they keep rising?

Past performance does not guarantee the future. It was merely the result of a particular period when logistics demand was strong; afterward, during the rate-hike period, many REITs went through corrections together. You cannot conclude that a particular sector 'will rise going forward,' and you must look at the maximum drawdown and interest-rate sensitivity together.