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Date: September 4, 2018
Category: Real Estate

Specialty REITs – A Growing Niche in the REIT Market

When you hear the term Real Estate Investment Trust, or REIT for short, you probably think of investments in major sectors like apartments, office, and retail. But there’s a growing niche in the public REIT market – specialty REITs.

Specialty REITs offer something for everyone. They dabble in just about everything, including student housing, casinos, prisons, senior housing, cannabis facilities, and cell phone towers, to name a few. They focus on filling voids in the market, and investors have noticed. These REITs have found an increasingly receptive audience as of late due to their unique core competencies that provide a competitive advantage.1 And since specialty REITs are typically early in the real estate cycle, they have the potential to further diversify real estate portfolios and mitigate risk as other sectors enter the latter stages.

And while many of these REITs have seen double-digit growth in 2018 compared to the broader REIT market, there are several key specialty sectors to keep an eye on.1

Student housing REITs are at the top of the class

In recent years, student housing has graduated into a sought-after real estate sector. Today’s student housing isn’t what it used to be. It’s a far cry from the cinder block walls and artificial light you may remember. Now, student housing is comprised of modern apartments in off-campus buildings that are equipped with lifestyle amenities like fitness centers, roof deck pools, and lightning-fast WiFi.

And just as student housing itself has evolved, so has its popularity as a viable investment option. Demand for student housing continues to rise thanks to urban colleges that offer students an attractive mix of culture and convenience, and large public universities that offer value and a “true college experience.” As a result, demand is outweighing current supply, creating a unique investment opportunity.2

In fact, student housing has even been referred to as “recession-proof” due to its ability to withstand financial crisis and its lack of volatility. That’s because people often go back to school during economic downturns, leading to a surge in new enrollment and demand for student housing. Subsequently, over the last 14 years, student housing’s average return was 2.8 percent, which was relatively close to the multifamily average return of 3.7 percent, another supposed “recession-proof” sector.2

There’s also future enrollment to consider. More Millennials are going to college than any other generation, and as a result, enrollment in higher education is expected to increase 14 percent, up to 23 million by 2024, further fueling student housing demand.2

A new lifestyle for a growing senior population

Just as the Millennial generation is driving demand for student housing, the Baby Boomer generation is aging and increasing the need for senior housing.

Today’s senior housing ranges from senior-oriented facilities offering independent living options to those offering assisted care. And with 10,000 Baby Boomers turning 65 every day, the sector has seen
continued growth. For many, the move to senior housing has become a lifestyle choice rather than a move based on medical needs.

As a result, Boomers are moving into senior housing much earlier and more frequently than ever before. The sector’s penetration rate for the 80-plus age group has climbed 70 basis points over the last eight years to 11.7 percent, according to Green Street’s most recent figures, and is predicted to continue rising over time with increasingly strong population growth.3

As you can see, demographics and changes in preferences are helping to provide strong tailwinds to the senior living sector, boosting the long-term need for these properties and services.

Cannabis REITs blaze ahead

Going even further outside of the traditional REIT box, cannabis facility REITs present a unique opportunity for investors to capitalize on the legalization and expansion of the industry.

In recent years, there’s been a clear shift in the way the public perceives cannabis. As of October 2017, a study by Gallup found that two out of three respondents supported the legalization of marijuana. By comparison, in 1995, support was a mere 25 percent. As a result of this shift, investors are noticing opportunities.4

So, how do cannabis REITs work? It’s not much different that your traditional office or industrial REITs. First, they acquire real estate and facilities in the U.S. that can be used for medical cannabis harvesting, and then they lease those facilities for long periods of time to cannabis operators. Due to federal illegality, cannabis operators typically struggle with access to capital and have difficulties borrowing money from banks and lenders. But the REIT’s structure allows a third-party to own the real estate, make improvements, and then lease it back to the operators with long-term agreements. As a result, it generates predictable cash flow and high growth within the industry.4

The legal cannabis industry has the potential to be very lucrative. Innovative Industrial Partners*, a cannabis REIT, recently calculated its average initial yield on invested capital for its properties to be 15.8 percent at the end of 2017, providing investors with a 3.2 percent yield.4

And as more states move towards the legalization of marijuana, more facilities may emerge, meaning more opportunities for this niche sector.

How can specialty REITs fit into a portfolio?

Specialty Public REITs are so diverse that they have the ability to offer something for everyone, so it’s no surprise that these lesser-known REITs have started to outgrow their “specialty” namesake in recent years.

These REITs have the ability to provide diversification and cash flow, but as with any investment, they come with risks. Specifically, specialty REITs may suffer from over-reliance on specific industries and demographics. And since they are an eclectic group, it requires some digging into the dynamics of the sub-sector to truly understand performance. However, there are funds available that utilize active fund managers that work to invest in these sub sectors at the right time, in an effort to benefit from current market conditions and trends.

The Lesson Here:

At the end of the day, it’s likely that more non-traditional specialty REITs will enter the landscape over time and present opportunities for potential growth as the economy develops and evolves.

1 National Real Estate Investor. Specialty REITs Carve Out Bigger Niche in the Market. 7/19/18.

2 Bisnow. These Two Public REITs Are Making a Killing in Student Housing. 7/10/17.

3 National Real Estate Investor. Six Predictions for the Seniors Housing Sector in 2018. 1/25/18.

The Montley Fool. A Marijuana REIT. Yeah, That’s a Real Thing. 4/27/18.


*As of 6/30/18, the Resource Real Estate Diversifies Income Fund invested 0.89% of its portfolio in Innovative Industrial Properties, Inc.


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