Forget Rate Hike, Ride on the Tech Wave to Gain from REITs

Investors in the REIT space are usually jittery when a rate hike is announced by the Federal Reserve and there is no exception this time too. However, instead of fretting over the rate that was increased by a quarter point in the recently concluded FOMC meeting, we ought to shift attention to the better outlook offered by the Fed in terms of GDP growth for 2018, a positive revision in projected inflation and expectations of a “strong” job market.

This can be far more rewarding because REITs business usually buoys up on a stepped-up economy and job scenario. And why not? A fatter purse obviously gives tenants more power to demand real estate space and shell out for higher rents.

More importantly, the technology wave is not only helping tech companies but is also driving demand for the related real estates. Take for example the e-commerce boom that has hugely affected retailers’ business model.

No doubt, this has adversely impacted mall traffic in recent times, keeping retail REITs on tenterhooks. However, this technological evolution is changing the dynamics of the real estate market and substantially driving up demand for space at a number of asset categories.

In fact, right from the time we use our smartphones, tablets or computers for a purchase, demand for REITs get a boost. This is because as we place our demand, the order is transmitted through cell towers and processed at data centers. Finally, the order is fulfilled through the industrial/logistics facilities and delivered at our doorstep.

Now, REITs happen to own many of these cell towers, data centers and logistics facilities. So without the offering of this critical infrastructure, the e-commerce value chain simply cannot sustain.

Along with making purchases online, an increasing number of people are consuming digital content. Going by numbers, per a forecast from Cisco, from 2016 to 2021, global Internet video traffic and mobile data traffic are estimated to witness a CAGR of 31% and 46%, respectively.

The estimated growth rate for the markets of artificial intelligence, Internet of Things, autonomous vehicle and virtual/augmented reality are also anticipated to remain robust over the next five to eight years. All these only make us hugely optimistic about extensive growth in demand for space at cell tower REITs including American Tower AMT and Crown Castle International CCI and data-center REITs such as Digital Realty DLR, CoreSite Realty COR and others.

Moreover, amid economic expansion, e-commerce development and heightened urbanization, companies are shifting their strategy toward services like same-day delivery and other options. This is propelling demand for distribution facilities near population centers, which not only help in lowering delivery time but also reduce cost of delivery.

Further, according to a report from Prologis Inc. PLD, for a given level of revenues, online retailers require three times the distribution center space compared with traditional retailers. As such, demand from the e-commerce sector has been escalating and per a report by Jones Lang LaSalle Incorporated JLL, in third-quarter 2017, this sector accounted for nearly 25% of total U.S. leasing demand compared with 14.7% in the previous year.

This is offering significant impetus for growth to industrial REITs like Prologis, Duke Realty DRE and others. So shareholders of such REITs have sufficient reasons to rejoice.

Therefore, instead of being bogged down by the current rate hike news, tap the many novelties in the REIT sector. Since individual market dynamics play a critical role in determining performance of REITs, favorable conditions only pump up chances of further growth.

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American Tower Corporation (REIT) (AMT) : Free Stock Analysis Report
 
Crown Castle International Corporation (CCI) : Free Stock Analysis Report
 
Jones Lang LaSalle Incorporated (JLL) : Free Stock Analysis Report
 
Prologis, Inc. (PLD) : Free Stock Analysis Report
 
Duke Realty Corporation (DRE) : Free Stock Analysis Report
 
Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report
 
CoreSite Realty Corporation (COR) : Free Stock Analysis Report
 
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