The REITs discussed above are mostly the equity type. They own properties and issue ownership shares to investors. The other major type is the debt REIT, which owns and invests in property mortgages and mortgage-backed securities. Shares of debt REITs provide access to mortgage interest income. For example, a residential debt REIT might own mortgage notes for single- and multi-family dwellings. The creditworthiness of the REIT shares mirrors that of the underlying loans. REITs composed mainly of sub-prime loans pay high-interest rates but have significantly more defaults than REITs made up of high-quality loans.
Industrial REITs earn rental and management income from industrial facilities. Many types of specialization are possible. Some REITs might concentrate on distribution centers and warehouses, whereas others might focus on technological properties, such as biochemical and pharmaceutical labs. Industrial properties are somewhat more resistant to economic cycles because their size and complexity are usually key to the functioning of large companies that can withstand downturns that destroy many small retailers. [more]
Infrastructure REITs own, operate and manage physical structures and facilities required to operate a society or enterprise. Property types include telecommunications towers, fiber optic cables, wireless infrastructure and oil and gas pipelines.
The properties owned by lodging REITs include hotels, motels, and resorts. These REITs earn income from operating these facilities and by leasing space in the properties to retailers and long-term tenants. Many different types of customers spend money at lodgings, from vacationers to business travelers. The revenue per available room (RevPAR) is a key determinant of success for lodging properties. The strength of the U.S. dollar can influence the number of international travelers visiting American lodgings – when the dollar is strong, prices for foreigners are higher in terms of their local currencies. A weak economy can benefit budget properties but threaten the margins at upscale locations. [more]
These REITs own and/or manage commercial office real estate, leasing space in these properties to tenants or managing office buildings owned by third parties, thereby earning management fees. Some office REITs concentrate on city-center properties, whereas others might favor suburban locations or a mix of both. They also might concentrate on certain customers, such as high-tech companies or government agencies. Office REITs do well when interest rates are low because issuing new debt for expansion isn’t too costly. A strong business environment, which is often at odds with low interest rates, is beneficial to office REITs, because renting businesses find it easier to pay rents on time, and demand for leased space is strong, especially in higher-quality buildings. On the other hand, when strong business conditions raise wages, the construction costs of new properties increase, cutting ROI. [more]
Residential and Healthcare REITs
Residential REITs own and manage apartment buildings, student housing, single-family homes, manufactured homes and other properties. They also may participate in the development and sale of residential properties. Revenues from rental properties depend on occupancy rates, rents, operating expenses and economic conditions. REITs are often differentiated by types of properties and geographical markets. Healthcare REITs own and/or operate properties that provide healthcare services to tenants, such as senior communities and nursing homes. The sector also includes hospitals and medical office buildings. The rents from senior communities are tied to the services required by residents, from home health assistance to dementia supervision. [more]
Retail REITs own and lease retail space, including shopping malls and retail centers. Anchor tenants are large stores that command a lot of mall space, whereas inline tenants are smaller and typically pay higher rents on shorter leases. Anchor stores benefit inline retailers by attracting foot traffic. Retail REITs might concentrate on the size of leasable areas, such as shopping centers sized for neighborhoods, communities, regions or multiple regions. Sizes run from under 100,000 to more than 800,000 square feet. Net-lease REITs are structured such that freestanding tenants pay rent and operating expenses (utilities, maintenance, taxes, etc.).
Like office REITs, retail ones often earn fees by managing third-party retail space. Retailers, and therefore retail REITs, are very sensitive to the business cycle. During downturns, many retailers struggle (sometimes unsuccessfully) to stay in business, which depresses rents and REIT share prices. Rents from leases drop as store closures and bankruptcies create a supply overhang. A strong economy has the opposite effect. The biggest threat to retail REITs is the growth of online competition. However, mergers between the two are becoming more common, as with the buyout of Whole Foods by Amazon. [more]
Various other types of REITs concentrate on different kinds of properties:
- Self-storage: The ubiquitous properties owned and managed by these REITs allow city, suburban and country dwellers to store personal and business property away from home. This is useful when space is short. [more]
- Data centers: These REITs own and/or manage facilities that store data and provide computing and communications facilities. They collect rent and management fees from customers who want to securely access data and servers without expending the capital necessary to purchase these facilities. [more]
- Specialty: These REITs own and collect rent from a mixed bag of properties, such as movie theaters, billboards, and other properties that don’t conform to major sectors.