REITs adopt a new strategy: diversification

The pandemic sent commercial real estate portfolios into disarray. The recovery is restoring some of that order, but leaving investors to sort out which sectors were temporarily disrupted or permanently altered. The same held true for real estate investment trusts, says Brian Sutherland, VP of commercial at Santa Barbara-based Yardi, and it’s led some to revisit their investment strategy.

“The biggest change is portfolio diversification,” says Sutherland.

Traditionally, most REITs specialized in a single category of commercial real estate. Today, however, REITs that previously focused on office are expanding into coworking. Those who primarily invested in multifamily are diversifying into industrial. In addition to observing these trends in the market, Sutherland says that Yardi has also partnered with clients seeking to diversify their portfolios. “Our solutions cross all asset classes, giving us a unique breadth of perspective into the various sectors of real estate,” says Sutherland. “As our clients’ strategic direction changes we can help them understand and navigate new markets.”

Behind this shift is a common motivation: growth. But chasing it was complicated by the pandemic, making the current speed of diversifications in the recovery somewhat unprecedented. “It is happening at a much faster pace than we have ever seen before,” notes Sutherland. “REITs need to continually grow. And if in their sector they have capital and they can’t deploy it because there are no available deals, they need to adapt.”

Many of these REITs already have some experience in managing real estate other than their core specialty. Others in recent decades have taken advantage of whole, master-planned neighborhoods composed of different property types.

“That trend in some capacity has been going on for a while, with the live, work, play and stay centers,” says Sutherland. “We will see more of that.”

REITs also own a growing number of individual buildings that mix more than one property type under one roof. Downtown areas are lined with office and apartment towers that have retail space on the first floor. As their neighborhoods evolve, those mixed-use towers are including increasingly varied kinds of real estate.

“I suspect we are going to see more multifamily build-outs happening in current office towers. We are going to see hospitality mixed in,” says Sutherland. “We are going to see coworking in office buildings as well, potentially as an amenity within the property.”

Retail properties are also diversifying. Some will include retail space in front, along the sidewalk, and industrial space in back that helps the retail tenants fulfill orders more quickly and potentially compete more effectively with pure online retailers like Amazon.

As REITs own and manage more of these mixed-use properties, it becomes less and less of a leap for them to simply add different types of real estate to their portfolios.

“It has to do with answering to their investors and continuing to grow,” says Sutherland. “As things evolve, it is important to put capital where the market is moving. Paying attention to market trends, in this case the increase in portfolio diversification, helps identify where the best results will come from.”