Equity REITs consist of eight different sub-industries:
- Diversified REITs—comprised of companies that operate across at least two different property types, as exemplified by one company that operates in both the commercial and residential sectors
- Industrial REITs — comprised of companies that acquire, develop, own, lease and manage industrial warehouses, distribution centers and other properties
- Hotel and Resort REITs — comprised of companies that acquire, develop, own, lease and manage hotel and resort properties
- Office REITs — comprised of real estate firms that acquire, develop, own, lease and manage office locations
- Health Care REITs — comprised of hospitals, nursing homes, assisted living facilities and other healthcare properties
- Retail REITs — comprised of companies involved in the acquisition, development, ownership, leasing and management of retail locations
- Residential REITs — comprised of companies that acquire, develop, own, lease and manage residential properties, including multifamily homes, apartments, manufactured dwellings and student housing
- Specialized REITs — comprised of companies that acquire, develop, own, lease and manage real estate ventures that do not fit into one of the categories above
The benefits of investing in equity REITs include a more diversified investment portfolio and, in some cases, excellent tax savings opportunities. For instance, if a REIT distributes 90 percent or more of its taxable income as dividends, it isn’t taxed at the corporate level.
While the majority of income paid back to investors is certainly good for investment purposes, it comes with the disadvantage of reinvesting fewer profits into the company, which has the potential to impact future returns negatively.
Real Estate Management and Development Companies
The second type of REIT is real estate management and development. This category is separated into four sub-industries:
- Diversified Real Estate Activities — comprised of companies that develop, manage or provide real estate-related services to properties without a dominant business line
- Real Estate Operating Companies — comprised of companies that lease or manage real estate properties
- Real Estate Development — comprised of companies that develop and sell real estate properties
- Real Estate Services — comprised of agents, brokers, appraisers and others involved in real estate services
This type of REIT offers investors several key benefits. For starters, these investments tend to produce high dividend payouts. Investors also gain direct exposure to real estate developers and, in many cases, are the first to take advantage of future investment opportunities with them.
There are, however, some disadvantages to investing in these REITs. For instance, they don’t offer the same level of diversification as most equity REITs. Plus, not all of the sub-industries offer direct exposure to real estate developers.
While there are two categories of REITs with their associated sub-industries, all operate within a limited number of sectors. Each of these sectors focuses on a distinct property type, which include:
- Offices — everything from skyscrapers to office parks
- Data centers — companies that help secure and protect data and equipment, including everything from providing uninterruptable power supplies to maintaining air-cooled chillers and even physical security
- Industrial facilities — warehouses and distribution centers
- Self-storage facilities — companies that own and manage self-storage facilities in which customers pay monthly rent to store belongings
- Retail facilities — shopping malls, outlet centers, strip shopping centers anchored by grocery stores and power shopping centers anchored by big box retailers
- Infrastructure — fiber-optic cables, wireless networking infrastructure, cellular towers and electric and gas pipelines
- Lodging — hotels, motels, resorts and other properties that fall under the hospitality umbrella
- Residential — apartment complexes, off-campus student housing, manufactured home developments, as well as single-family homes and rented spaces
- Healthcare facilities — assisted living and skilled nursing facilities, hospitals, medical office buildings and senior centers
- Timberland — companies that specialize in harvesting and selling timber
Why should you invest in REITs? Because REITs are historically reliable investments that are well regarded for competitive returns and long-term capital appreciation.
REITs also tend to have a low correlation with other assets, making them an ideal option to build a more diverse investment portfolio.
In the end, reliability makes REITs an attractive investment opportunity to reduce risks and improve returns.
Learn more about real estate investment trust investing, the investment process, and the different types of REITs in this guide from Prologis.
Learn about commercial real estate development and its many processes. Take advantage of a commercial real estate development checklist.
If you're new to the world of commercial real estate, be sure to try these tips for negotiating a stronger and more successful commercial lease, from Prologis.