Real estate investment trusts (REITs) emerged in 1960 as financial vehicles accessible to all, democratizing investment into wealth-generating real estate assets.
Since then, REITs have consistently surpassed stocks in performance. This superiority is exemplified by three distinct REIT subcategories, showcasing exceptional power in outshining the S&P 500. Let’s delve into these market-leading REIT variations.
Accentuating Wealth Accumulation
Self-storage REITs have exhibited remarkable strength, yielding an average annual total return of 17.3% since 1994. This substantial performance far surpasses the S&P 500’s 10.1% average annual total return across the same period.
Within the self-storage category, the top tier in cumulative sector returns since 1999 clearly showcases its dominance:
Image source: Extra Space Storage.
Leading this pack, Extra Space Storage (NYSE: EXR) has been a standout performer. By the close of 2023, it held the title of the second-best performing REIT in the last decade, boasting a remarkable 443% total return.
Harnessing Dual Forces
Industrial REITs claim the second-best performance mantle within the REIT landscape since 1994, with an average annual total return of 14.4%. Notably, Rexford Industrial and Prologis (NYSE: PLD) claimed two of the top five REIT returns at 440.8% and 379%, respectively, as of the end of the previous year.
The strength of industrial REITs is bolstered by the accelerated adoption of e-commerce and evolving supply chain dynamics, particularly benefiting logistics-focused REITs. Over the last five years, these REITs have achieved a 9% annual growth in core FFO per share, accompanied by 10% compound annual dividend growth, with industry stalwart Prologis leading the charge.
Seizing Opportunity in a Tight Housing Market
Residential REITs showcase the third-highest performance among REIT subgroups since 1994, boasting a solid 12.7% annual growth rate. Factors propelling this group’s success include resilient demand for rental properties and imbalances in the housing market since the Financial Crisis, fueling the need for rental accommodations.
A standout investment in this segment is Equity LifeStyle (NYSE: ELS), securing the fourth spot in best-performing REITs in the last decade with a nearly 400% total return. This success is underpinned by the economic resilience of manufactured-home communities, enabling sustained rent increases and robust growth metrics compared to the sector average.
The enduring allure of REITs, fueled by strong performances of self-storage, industrial, and residential REITs, presents compelling investment prospects for the savvy investor. With the foundational factors driving these REIT subcategories’ success intact, there lies significant merit in including one or more of these REIT classes within one’s investment portfolio.
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