Since 1974, REITs generally have outperformed other assets, including gold, during periods of high inflation, data from the National Association of Real Estate Investment Trusts in Washington show. That's because commercial REITs generally structure leases that let them adjust rents periodically to respond more quickly to inflation, said Michael Grupe, executive vice president of research and investor outreach at NAREIT.
REITs don't protect a portfolio in all types of inflationary environments, said Robert Greer, product manager of Pacific Investment Management Co.'s "Real Return" business, a series of funds and strategies designed to protect against inflation. "REITs may not protect you from inflation caused by a rise in food and energy prices, especially if caused by a constraint in supply," he said.
Another consideration is whether the flows into REITs have bid up prices ahead of the potential for appreciation, said Sam Katzman, chief investment officer at Constellation Wealth Advisors, a New York-based firm managing about $5 billion in assets.
While the industry is currently trading at a "slight discount" to fair value, according to Morningstar analysis, apartments are among the more "overvalued" types of REITs, said Martin. "We'd be very, very company, stock and geographic specific there."
Demand for apartments has soared in the U.S. as home foreclosures forced people out of their residences and prospective buyers have found it harder to get mortgages. Equity Residential, the largest publicly traded apartment REIT in the U.S., has gained about 16 percent year-to-date as of Sept. 12. AvalonBay Communities Inc., the second-biggest multifamily housing owner, has gained about 19 percent this year.
"Property types including office, industrial, retail and lodging may experience more operating performance volatility if the economy stalls, which may negatively impact dividend growth, cash flow and share prices," Morningstar's Martin said. The research firm is focused on REITs that can weather a slower economic environment including those with lower debt levels and dividend payout ratios, and ones that invest in more need-driven properties such as health-care facilities and grocery-anchored shopping centers, he said.
Longer Leases
Even in a slow-growth economy, commercial properties with longer leases will do well because they have a set amount of cash coming in and there isn't a lot of competition since there's little construction right now, said Jon Cheigh, senior vice president at Cohen & Steers, a New York-based firm with about $44.3 billion in assets, the majority of which is in real estate.
Agran, the Los Angeles investor, said he generally sees publicly traded real estate as a good investment no matter what the economy does or where inflation goes. In flush times, the firms can raise rents, while in recessionary periods, they have access to investor capital to buy properties that others are disposing of "at bargain-basement prices," he said.
"With real estate it's kind of like being in the business of making waxed fruit," he said. "It's there, it's going to be there."