721 UPREIT – Asset Class Diversification

One of the true benefits of the REITs is diversification and potential income stability. Oftentimes a REIT is comprised of $5B – $10B of Real Estate and often spans multiple asset classes to create meaningful diversification. For example, a REIT may have 4 to 5 main asset class focuses with billions of dollars in each of: apartments, single-family rental homes, grocery-anchored retail centers, industrial facilities and large distribution warehouses.

Each of these asset classes is following intentional investment trends the REIT feels will continue to deliver for investors.

Class A Luxury Apartment Communities

Class A luxury apartment communities are a popular asset class because higher interest rates and more stringent lending practices have made it more challenging for young people to purchase their first home so they often rent for significantly longer than previous generations. Further, the millennial generation highly values mobility to maximize job opportunities and the simplicity of renting over the maintenance demands of home ownership. Lastly family formation, and having children, is delayed amongst current generations meaning staying in apartments longer is more feasible since they don’t require more space to accommodate children.

Single Family Homes

For many of the same reasons as above, single family homes have become a high demand investment strategy particularly if the families do need more space to accommodate children but are unable to gather a sizable down payment to make a purchase. In many markets, renting a home is half the full ownership cost of burden

High Quality Tenant Industrial Warehouses

High quality tenant industrial warehouses have become a high demand investment class by the countries’ largest and most established firms. This surged through the COVID pandemic which changed retail purchasing habits. This significant increase in online retail commerce has led to the closure of many retail store fronts but the merchandise must be stored to fulfill the online purchases. Large industrial facilities have filled the void that the retail stores once satisfied.

Retail Centers

Success in the retail landscape is highly dependent on having tenants with frequent weekly visitors such as a grocery anchored retail establishment with a well-respected grocery brand. Even throughout the COVID pandemic, online grocery ordering continued as well as the average person still visits the grocery store twice a week.  These frequent visits benefit the smaller inline retail center tenants.  Critical to the success of these retail centers, is to have entertainment or service focused businesses that are not easily replaced by online Amazon ordering.

Having this high-quality mix of assets valued at $5B to $10B that generates monthly rental payments lead to high likelihood of income stability. REIT distributions are set by the REIT’s board of directors. If the monthly or quarterly distributions of said REIT is based off of 100+ quality business rental payments, then the income stability tends to be high but can be subject to economic market conditions.