Real estate investment trusts, or REITs, have been gaining a lot of attention in recent years. With its survival of the last couple of recession, REITs have slowly gotten the reputation of being resilient investments. There’s a lot of truth to that notion, but it isn’t always easy to determine whether an REIT is a good buy or whether now is the right time to invest. History has taught us a few lessons, but in today’s world of uncertainty, you can never be too careful. One good measure of determining whether it’s a good time to invest in REITs is to look at the economy. Here are 5 economic circumstances that have proven to be good for REITs.
1. Market crashes
We have to start with an overall market crash because it’s what we’ve seen in the past. REITs are investments that are mostly resistant to the volatility of the market. According to this article, REITs always tend to recover from market crashes—almost at 100% of the time. This is the reason why it’s profitable to invest in an REIT right after the market crashes. The uncertainty may be high, but the shares are always low. Surprisingly enough, very few investors take advantage of such an opportunity. It can become daunting, especially after what we’ve seen happen during the pandemic. Certain REITs are taking a little longer to recover, but the trend is still going up regardless. There’s really no way to time the market; but if you look at trends in the past, you can be assured that most things go back up after they go down.
2. Increase in homeownership
One measure to see how the economy is faring is homeownership. Homeownership rates normally take about 1-2 years to recover from a recession. The exception to this was the 2008 housing market crash. That event affected the economy for several years after the recession was over, and it might still be affecting some people today. An increase in homeownership signals an improvement in household finances. If anything, it also signifies overall confidence in the housing market altogether. With that kind of confidence comes a boost in mortgage and/or residential REITs. Homeownership and relatable expenses also contribute significantly to GDP growth, which is a sign of economic stability. Once you see the homeownership numbers are increasing and the overall sentimentality about homeownership is positive, it would mean it’s time to look into a few REITs to invest in. As always, it helps to make sure that you’re investing in a time-tested REIT if you want lower risks.
3. Improved labor market
Unemployment rates are an incredible predictor of economic status. It’s one of the most reliable cyclical GDP indicators out there, and it’s definitely one to look into when you’re considering REIT investments. More specifically, it’s important to look into the actual labor force participation rate by the prime working age of 24 to 54 years old. This indicator always drops during a recession and would normally take a couple of years to recover. The key is that this participation rate always recovers. Although an improved labor market wouldn’t directly reflect how a particular REIT would perform, it does provide a good indication of economic growth. If you’re looking to invest in REITs that has closer ties to labor—industrial, commercial, retail, warehouse REITs, or the like—then you can use improved labor statistics as an indication of REIT performance as well.
4. Excessive CRE demands + low vacancy rates
Looking at commercial real estate phases will also help you determine whether it’s a good time to invest in REITs or not. Particularly, you want the market to have excess in demand with low vacancy rates. This indicates that there’s a good balance in the CRE market—no overbuilding, steady demand growth, steady occupancy, and overall confidence in the economy. This economic circumstance is useful if you are looking to invest in commercial REITs. Commercial REITs are some of the best investments to diversify any portfolio, but not all commercial REITs are created equal. Like any other investment, REITs require a tremendous amount of research. But a well-balanced CRE market is a good starting point for investing in commercial REITs. There are a lot of external and internal risks associated with CRE markets, and it’s more than what this article intends to cover. Even these indicators of excessive CRE demands and low vacancy rates are not enough to warrant a solid decision. Do the CRE research, and your commercial REIT decision would be better.
5. Increase in spending
When we talk about economical spending, we’re talking about two parts: consumer spending and investment spending. An increase in both these metrics is a good economic circumstance for REITs. Consumer spending, on one hand, is the largest sector of the US economy. But an increase or even a steadiness in consumer spending doesn’t always translate to solid opportunities for investing. Even after a market crash, there will be consumer-spending going on. After all, we all need to spend in order to live—to pay for necessities such as shelter, food, clothing, etc. Investment spending, on the other hand, will give you a better measure for REIT investing. Any plunge in investment spending will contribute greatly to the overall decline of the economy. Alternately, any increase in investment spending is a good indication of a bullish market. This is also a good indicator for investing in REITs. Of course, there are hundreds of REITs you can invest in, and each one warrants some research before you commit to them. As long as you keep an eye on the motions of the market and investment spending, you can get a good pulse into when you should buy your next or your first REIT.