In recent years, the U.S. real estate sector expanded to include a wide range of companies that own and operate a diverse set of assets. As recently as 2010, the sector was dominated by companies that owned traditional commercial properties such as office buildings, apartment complexes, warehouses, and shopping centers. However, the recent growth of specialized REITs—like those that own cell towers, data centers, and timberland, among other non-traditional real estate assets—has transformed the sector into a complex array of companies that derive income from highly distinct assets. While all REITs share certain characteristics such as offering relatively high dividend yields, the fundamental differences in the underlying assets owned by REITs across sectors have led to different investment characteristics and patterns of returns and volatility.
REIT SECTOR OVERVIEW
There are two main types of REITs: equity REITs and mortgage REITs. Equity REITs own and operate income-producing real estate and typically earn income through rents. Mortgage REITs lend money directly to real estate owners and operators, or indirectly through the purchase of mortgages or mortgage-backed securities, and they earn income from the interest on these investments. Based on the property type each equity REIT owns, we can further categorize it by its sector. Most REITs specialize in a single property type, while some manage portfolios that include multiple types of properties. Exhibit 1 provides an overview of the main equity REIT sectors.