10 Stocks That Show the Real Estate Boom Has Arrived (Update2)
BOSTON ( TheStreet) -- The U.S. real estate market is in two worlds, with residential housing in the dumps and not yet worthy of consideration for investing. But commercial real estate, in the form of real estate investment trusts (REITs), is prospering.
For example, demand for rental apartments is booming because an uptick in employment has people relocating to areas with job opportunities. While at the same time, home ownership is at 12-year lows and not seen growing significantly anytime soon, and that boosts the earnings outlook for apartment-owning REITs.
And demand for commercial real estate, which includes shopping malls, office buildings and storage facilities, is showing steady growth, aided by years of almost no new construction, limiting supply, while a strengthening economy increases demand.
"Help from the current, very modest recovery has been enough to lift occupancy and rental rates for an industry group that includes office buildings, shopping malls, warehouses, industrial spaces, apartments, and hotels, to name a few," Fidelity Investments said in a research note. "These positive fundamentals have, in turn, boosted net income for REITs."
That recovery has been little noticed by many individual investors, given their still-strong memories of the mortgage-backed securities crisis and the plunge in residential home values, which has poisoned their views on all things real estate.
But REIT securities have been climbing since March 2009. The benchmark FTSE NAREIT Equity REITs Index is up 5.8% this year versus the S&P 500's 9.3%, after gaining 8.3% last year compared to the S&P 500's 2.1% rise. And that was after two straight years of 28% annual increases in the FTSE NAREIT Equity REITs Index.
Industrial property REITs are doing the best this year, with a 15.6% return, while mixed use (office and industrial) REITs are up 13%. As for residential REITs, S&P Capital IQ recently raised its fundamental outlook for the sub-sector to "positive" from "neutral."
"In our view, many Americans may be reluctant to purchase a home until price stability returns," it said. "Moreover, we think the number of potential renters is expanding due to a large cohort of echo boomers entering the workforce. The net result has been low turnover among existing apartment dwellers and strong demand from prospective new renters."
Given the supply and demand forces, S&P said apartment rents should grow 5% to 6% or more on new leases this year, boosting REITs' revenues.
Here are summaries of 10 highly rated residential and commercial REITs that focus on several different markets:
10. Home Properties (HME)
Company profile: Home Properties, with a market value of $2.8 billion, specializes in garden-style apartments in suburban locations throughout the space-constrained Northeast and mid-Atlantic suburban markets.