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A Top REIT in an Ailing Sector

February 03, 2010 – by Richard Band

We all know that housing prices have gotten hammered in the past few years. But did you know that commercial real estate (office buildings, shopping centers, apartments) has done even worse? According to statistical services that track commercial property, values nationwide have fallen 35%-40% from their peak in late 2007.

The pain may not be over yet, either. While market conditions vary from one locality to another, the odds-on call for 2010 is that prices for commercial real estate will continue to erode in most parts of the country, though perhaps “only” another 5%-10% in a majority of cases.

Given the severe downturn in commercial property values (and bleak near-term outlook), it’s amazing how Wall Street has responded. As a group, publicly traded real estate investment trusts (REITs) have doubled from their March 2009 lows. Starved by the Federal Reserve’s ultra-low interest rates, income investors have gobbled up REITs. The result?

From a peak yield of around 10% last winter, the average property-owning REIT now churns out a measly dividend of 3.7%, hardly enough to compensate for the risks lurking in the shadows.

7 Real Estate Investments You Don’t Want to Shack Up With

My first piece of advice to you, then, is a word of caution. Most publicly listed real estate investments are overpriced. Boston Properties (BXP), the largest public owner of office buildings, and Equity Residential (EQR), the largest public apartment landlord, are both trading at a nosebleed-high 16X estimated cash flow for 2010. In a struggling economy, such a valuation is ridiculous. Sell both stocks.

Other REITs and real estate investments you should unload now include:

  • AvalonBay Communities (AVB)
  • BRE Properties (BRE)
  • Corporate Office Properties (OFC)
  • Diamondrock Hospitality (DRH)
  • Essex Property Trust (ESS) 

The One REIT to Own in an Ailing Sector

Fortunately, a few excellent values remain among publicly traded real estate companies. Here’s a top REIT worth buying at, or slightly below, current prices.

Celebrating its 50th year in 2010, Washington Real Estate Investment Trust (WRE) maintains a conservative risk profile. WRE owns office buildings (including medical offices), warehouses, shopping centers and apartments in and around the District of Columbia. While government tenants account for only a small percentage of WRE’s revenues, the trust benefits from the economic stability of the Washington metro area.

Government employees — and the employees of government contractors — provide a steady stream of income for local businesses. Thus, WRE posted a 93% occupancy rate during the September quarter, an increase of 190 basis points from the year-ago period. Most landlords across the nation suffered declining occupancies due to the recession.

At a current yield of 6.3%, WRE delivers almost twice as much cash as the average REIT.

In the February issue of Profitable Investing (online now) Richard Band recommends another realty vehicle poised to deliver safe, double-digit returns over the next few years, plus the names of seven more investments to avoid. Get complete details, including Richard’s specific buy instructions, by joining Profitable Investing risk-free today.