Thirteen types of REIT stocks and how to invest in them offer important insights for potential REIT buyers.
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.
What is a REIT?
A REIT owns, operates or finances income-producing real estate. There are a wide range of property types that REITs invest in, including apartment buildings, warehouses, offices, retail centers, medical facilities, data centers, hotels, cell towers, timber and farmland.
Generally, REITs follow a straightforward business model: the company buys or develops properties and then leases them to collect rent as its primary source of income. However, some REITs do not own property, choosing the alternative route of financing real estate transactions.These REITs generate income from the interest earned on the financing.
REITs are required by law to distribute more than 90% of their earnings in the form of dividends. This can make them incredibly profitable for investors and provide a steady stream of cash flow in the form of regular, high dividends.
Investors can buy shares in a REIT company, the same way shares can be purchased in any other public company. Investors can buy REIT shares on major public exchanges such as the NYSE or NASDAQ.
Read below to learn about the important nuances by sector and how to invest in REIT stocks.
13 Types of REIT Stocks – #1: Office
- Number Publicly Traded: 21
- Year-to-date (YTD) total return as of 7/31/2022: -21.91%
Office REITs own, manage or develop office real estate. 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 wide variety of investable markets allows office REITs to be highly specialized, but perhaps their greatest advantage comes from their characteristically stable cash flow. By owning large office buildings and renting them out to several tenants at once, they are less reliant on single clients and more prepared to stay profitable in the event of multiple tenants breaking their leases.
However, since the coronavirus pandemic, long-term work from home policies have diminished the need for office space. 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 Publicly Traded: 14
- YTD total return as of 7/31/2022: -18.03%
Industrial REITs own and manage 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 buildings require a minimal need for structural customization. Therefore, these REITs have an advantage over the other REITs in that they require comparably low startup capital to build or prepare their properties. Low expenses allow industrial REITs to be highly efficient, returning greater profits back to their shareholders.
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.
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 Publicly Traded: 39
- YTD total return as of 7/31/2022: -11.41%
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 another may own outlet centers or grocery stores.
Among freestanding stores, retail REITs use triple net leases and require their tenants to cover building insurance, real estate taxes and building maintenance in addition to their base rental rate. This makes freestanding store tenants highly stable and able to provide large, uninterrupted cash flow.
However, 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 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).
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 Publicly Traded: 22
- YTD total return: -14.55%
Residential REITs own and operate various types of living spaces including apartment buildings, single-family homes, manufactured homes and student housing. Oftentimes, residential REITs focus on property types, but can also subdivide their specialization into geographical markets or the demographic of potential tenants.
The portfolios of these REITs differ widely, ranging from urban apartment complexes to suburban housing units. Most residential REITs focus their investments in metropolitan areas as there is a continued need for housing in those areas. These stocks provide stable income over a long period of time.
The additional risk factor that comes from residential REITs is the occasionally lower credit of their tenants, as they often rent out to families instead of massive corporate tenants. But this risk is typically mitigated by the unusually large number of tenants that give them an additional security blanket when compared to other investments.
Furthermore, residential REITs face the risk of holding an oversupply of rental properties relative to the demand of such properties. There is an additional risk associated with the housing market. For example, as the homeownership rate rises higher, the less demand there is for rental properties.
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 Publicly Traded: 17
- YTD total return as of 7/31/2022: -4.00%
Hotel REITs own and manage hospitality properties such as hotels, resorts and other travel accommodations. 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.
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.
Investing in hotel REITs can be highly profitable, they do have the hotable drawback of seasonality. Since a great deal of income is brought on by tourism, profits are higher during the summer months and holiday weeks and sometimes considerably lower elsewhere. This can cause more volatile share prices than other similar investments.
Strong hotel and resort REITs are adequately diversified to combat this instability but it can be a risk factor for newer investors or others more unfamiliar with REITs. Before investing in a REIT of this kind, investors should find patterns in the yearly price changes and be acutely aware of what kinds of seasonal volatility they can expect.
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 Publicly Traded: 6
- YTD total return as of 7/31/2022: -12.30%
Self-storage REITs own and operate storage facilities, leasing out storage space to individuals and businesses on a short-term basis.
With this type of REIT, leases are typically on a month-to-month basis, leading to some instability on the part of the property owners. The facilities themselves are incredibly low-cost with minimal construction, maintenance and operating costs allowing for an incredibly slim operation. REITs of this type claim to break even with as little as 30% of its available capacity occupied.
Despite this, self-storage REITs are not without risk. Storage of this kind is a discretionary expense, meaning they usually face more vacancies than other classes of REITs during recessionary periods.
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 Publicly Traded: 17
- YTD total return as of 7/31/2022: -4.62%
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, research buildings, senior living facilities, life science offices, wellness centers, etc.
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 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 healthcare as the older population ages further.
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 Publicly Traded: 4
- YTD total return as of 7/31/2022: -7.90%
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.
Timber REITs are structured less like a real estate equity and more like a commodity, maintaining similar performance in profitability and share price to other cyclical stocks such as soil and basic materials.
Although the primary mode of profit for timberlands is the sale of timber and wood products, the singular goal of these organizations is to maximize the value of their land. In some cases, this means renting out the real estate to tenants or even maintaining the land as a conservation site or park.
Moreover, 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 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), Potlatch Deltic Corporation (NASDAQ: PCH) and Rayonier Inc. (NYSE: RYN).
13 Types of REIT Stocks – #9: Infrastructure
- Number Publicly Traded: 6
- YTD total return as of 7/31/2022: -9.54%
Infrastructure REITs operate and own real estate which pertains to infrastructure. Examples of infrastructure real estate include fiber cables, wireless infrastructure, telecommunication towers and energy pipelines.
These REITs can be wrapped into the private sector or occasionally do a great deal of government contracting, depending on the asset class they focus on.
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 internal 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.
Large infrastructure REITs include American Tower Corp. (NYSE: AMT), Crown Castle International Corp. (NYSE: CCI) and SBA Communications Corp. (NASDAQ: SBAC).
13 Types of REIT Stocks – #10: Data Centers
- Number Publicly Traded: 5
- YTD total return as of 7/31/2022: -17.97%
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.
In addition to renting out space to tenants, whether it be a single building or in a hyperventer, data center REITs often provide connection services allowing for physical connections between companies’ servers.
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 relatively recession-proof due to the ultra-long-term leases signed by their tenants. Data center REITs are a smart investment because they provide a service that is becoming more and more essential.
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 Publicly Traded: 19
- YTD total return as of 7/31/2022: -2.55%
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 has the potential to perform well even when one of its property types isn’t producing much income. The potential pitfalls of diversified REITs vary by individual REIT, and depend on the properties in a given REIT’s portfolio.
Less work is required of the investor when they find a REIT they like and trust because much of the work of diversification goes to the managers.
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 Publicly Traded: 11
- YTD total return as of 12/31/2021: 2.05%
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.
The strength of specialty REITs lies in the investors’ ability to invest in asset classes they know and understand whilst benefiting from the tax and dividend advantages of the REIT structure.
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 Publicly Traded: 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.
In addition, 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. Organizations facilitate housing market ownership by moving more money between banks and individual buyers while making the process of purchasing a property less risky for all other parties involved.
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.
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 may invest in public REITs on major exchanges, either by purchasing shares, or by investing in a REIT mutual fund or a REIT ETF.