Technology-oriented REITs have a clear growth trajectory for the years ahead, fueled by secular changes in the economy that are impacting all aspects of daily life.
Portfolio managers Paul Curbo of Invesco and Evan Serton of Cohen & Steers discussed the impact of some of these changes with Bloomberg Intelligence analyst Lindsay Dutch during a May 16 webinar.
Curbo noted that 10 years ago, traditional real estate sectors comprised a higher weighting within the Nareit All Equity REIT Index. Today, the index mirrors a diverse mixture of sectors and is indicative of the economy’s tilt toward technology. A key factor behind that change has been the introduction of the Internet of Things. “We’re all using more data,” he said, adding that expectations are for data traffic to increase more than 40% per year going forward. “That’s a very different dynamic than traditional real estate.”
Tower REITs are one of the key REIT sectors benefitting from the ramp-up in technology. “The secular growth we are witnessing in demand is still in its relatively early stages and [it] can persist into the medium term,” Serton observed. Curbo added that strong demand from the wireless carriers due to increased mobile phone usage is expected to persist.
Serton pointed out that the top three tower REITs own about 60% of the total tower structures in the United States, giving them a strong incumbent advantage. “Economics favor the existing three landlords to a significant amount,” he noted.
One possible threat to the tower REITs would be from the proposed merger between Sprint and T-Mobile, Serton said. “There’s been a clear inverse correlation between tower REIT performance and carrier consolidation,” he said. The merger is currently undergoing regulatory review.
Turning to data centers, Curbo noted that demand continues to outpace supply in the U.S. Supply growth outside the U.S. has occurred at a relatively slower pace, he added, resulting in good growth prospects in Europe and Asia. Serton, meanwhile, pointed out that speculative development in the data center sector remains low.
A key trend in the industrial sector, meanwhile, is the development seen in and around urban areas. That’s increasing capital expenditure for REITs, according to Serton. He added that in the coming years he expects to see more development of multistory warehouse facilities, in line with Prologis, Inc.’s (NYSE: PLD) new multistory development in Seattle.