Despite woes in residential real estate, the commercial real estate sector appears to be showing signs of stabilization shinning a light on the iShares Dow Jones US Real Estate (NYSEARCA:IYR), the Vanguard REIT ETF (NYSEARCA:VNQ) and the iShares Cohen & Steers Realty Majors (BATS:ICF) .
In the month of July, vacancies in apartment buildings, office complexes, retails malls and self-storage facilities showed no significant signs of rising indicating that the sector could be starting to stabilize. In fact, occupancy rates for apartment buildings are currently around 92 percent and around 84 for office buildings, much higher than a year ago. Additionally, rents on commercial properties are no longer falling and numerous real estate investment trusts, known as REITs, are reducing debt on their balance sheets.
Another reason some REITs are attractive is that some have shored up their balance sheets by raising additional cash and positioning themselves in such a way to gobble up distressed properties that are coming to market which are privately owned by owners that don’t have access to capital markets and could potentially be forced into foreclosure or default.
In fact, Boston Properties (NYSE:BXP) is currently sitting on north of $1 billion in cash and untapped credit lines giving it the means to acquire. Commercial real estate giant, Simon Property Group (NYSE:SPG) has already started moving on distressed properties and Brandywine Realty Trust (NYSE:BDN) is buying office buildings in Philadelphia.
Although there are a handful of REITs which have positioned themselves nicely in the market, there are numerous commercial loans that are in default. With this in mind, it is important to take positions in REITs that have improving fundamentals, strong balance sheets and the ability to raise capital.
Additionally, it is important to keep in mind the effects that macroeconomic forces like the unemployment rate, GDP growth, and disposable income have on the commercial real estate markets. In general, as unemployment rates rise, GDP growth slows and disposable income levels dissipate, the commercial real estate sector takes a hit. To help protect against the inherent risks involved with investing in the aforementioned REIT ETFs, the use of an exit strategy which identifies price points at which downward price pressures are likely to be seen is important.
As mentioned above, some diversified ways to play REITs which enable one to gain exposure to Simon Property Group and Boston Properties include:
- iShares Dow Jones US Real Estate (IYR), which carries an expense ratio of 0.47% and boasts a dividend of 3.55%
- Vanguard REIT ETF (VNQ), which carries an expense ratio of 0.13% and boasts a dividend of 3.6%.
- iShares Cohen & Steers Realty Majors (ICF), which carries an expense ratio of 0.35% and has a divided of 3.07%
Disclosure: No positions