The chatter is rising, and it has gone from whispers to shouting; commercial real estate (and the banking system as a whole) may be in big trouble. When Elon Musk and Berkshire Hathaway Vice Chair Charlie Munger come out with warnings, many across Wall Street pay attention. Musk feels that the biggest tail risk now is a commercial real estate debacle that may not be all that far down the road.
Musk said this about the potential for a meltdown:
Commercial real estate used to be something that was a Grade A asset, that if a bank had commercial real estate holdings those would be considered the highest security, some of the safest assets you could have. Now, that is not the case anymore. One company after another is canceling their leases or not renewing their leases. Or, if they go bankrupt, there’s nothing for the bank who owns that real estate to go after, because they were a previously strong company now dead. What do you do at that point?
The tough part for investors, especially those who are income oriented, is that many own real estate investment trusts (REITs) for their reliable quarterly (in some cases monthly) dividends. Most have fared poorly in the rising interest rate environment of the past year, and many are potentially shaky going forward.
One subsector that still has big-time growth potential and also offers solid dividends is the data center REITs. Jefferies still sees big growth in that arena and noted this in a new research report:
The data center market is shifting heavily in favor of landlords, with market vacancies around 3-4% in the US and 4-5% in Europe, and an increasingly constrained ability to deliver new power to support data center demand. Market rents have been rising over the past year, and we expect this trend to continue. We estimate that a return to modest leasing spreads, occupancy upside, and stronger development yields will push adjusted funds from operation per share growth to +5% to +15% in the coming years.
Another strong subsector that makes sense is the cellphone tower REITs. Regardless of the economy, consumers will continue to use their smartphones at an increasingly growing rate, as landline use continues to decline.
The following four top companies look like very solid ideas in these two areas, and all four can likely dodge the issues other REITs will be facing, especially if the economy goes into recession later in the year. While all are rated Buy at top Wall Street firms, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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