REITs offer potential for both capital appreciation and dividend increases. When the economy is doing well, companies expand and rent more office space. Employees, in turn, feel confident and rent larger apartments or storage units.
Companies also send employees out on the road to attract new business, so hotels do well. As businesses increase production and distribution of goods, they use more industrial space. And, with all this demand, REITs generally have increased pricing power.
The outlook for residential REITs looks positive. A lower homeowner rate, despite government incentives, and modest new supply (construction) look like they are both working in favor of multi-family operators.
Indeed, residential REITs — which usually own apartment buildings — reported average occupancy figures of more than 95% for the fourth quarter of 2011, allowing a push on new rents to higher levels.
Rents will continue to increase and roll through apartment portfolios in 2012 as U.S. job markets look to slowly recover. Many apartment REITs are also expressing renewed interest in acquisitions. The number of bidders and property valuations has increased in recent months.
It is easy to see a positive fundamental outlook on retail REITs as well. Although challenges remain and raising rents is always a contentious issue, its easy to think that increasing absorption of retail space should present retail landlords with more pricing power. If consumer spending and retail sales improve over the next 12 months, this should prompt a further slowdown in store closings.
The national office vacancy rate has stabilized at about 17.0%, up from about 12.5% at the end of 2007. If the economy improves vacancy levels should edge down in 2012.
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