Finding the Unbeaten Path in Commercial Real Estate

Contrary to popular belief, commercial real estate encompasses more than office buildings in core downtown areas. From cell phone towers to data centers to healthcare-centered properties and beyond, plenty of attractive investment opportunities lie off the beaten path as well.

Data Growth Boosts Cell Phone Towers

In 2015, global spending in the wireless communication space hit $822.9 billion. This year it is forecasted to exceed $900 billion. The onset of 5G (fifth generation) cellular network technology—designed to provide faster, more stable, more secure connections for mobile device users—will likely only accelerate the trend.

As we download and stream ever-greater amounts of video and audio content on our now-ubiquitous mobile devices, increased numbers of cell phone towers will be required to support the growing flow of content.

Major telecommunications carriers such as AT&T or Verizon sign long-term leases—up to 25 years—to utilize cell phone towers. And the leases usually grant the tower owners automatic increases of approximately three percent a year.

That means solid revenue and strong operating leverage for the tower companies, Morningstar equity analyst Matthew Dolgin recently noted. The tower companies can add tenants to existing towers and upgrade their equipment, boosting revenue significantly with little additional spending.

Data Centers Ride E-Commerce, Cloud Wave

Retail e-commerce sales are on track to total $3.45 trillion this year—more than double the 2014 total of $1.34 trillion.

Usage of those networks of remote computer servers known as “clouds” has soared as well: Global public cloud service revenue could reach $214 billion this year, up 17.5 percent from $182.4 billion in 2018.

All the computing and server power utilized in e-commerce and cloud activity translates to an increased need for data centers—i.e. buildings used to hold computer systems and accompanying telecommunications equipment and storage systems.

Companies are increasingly relying on hybrid cloud models, using a combination of cloud services and their own software, Dolgin writes. That's generating growth for co-located data centers, where multiple companies keep their servers and networking equipment in one place.

An Aging America is Good for Healthcare Real Estate

The Census Bureau forecasts that in 2020 the number of Americans aged 65 and up will total 56.05 million, up 14 percent from 49.24 million in 2016. And that number will likely rise to 65.23 million by 2025.

Whether it’s hospitals, specialized care centers or assisted living facilities, that trend could create tremendous opportunities for owners of healthcare-related real estate.

The top property owners in that sector are well positioned to take advantage, Morningstar equity analyst Kevin Brown argues. The increased focus on high-quality care at low cost will also boost these top players, he says.

Morningstar’s index of healthcare facility REITs (real estate investment trusts) showed an annualized return of 13.4 percent for the last 10 years through May 29.

How to Invest

So how can investors take advantage of the opportunities provided by all this uncommon commercial real estate?

The easiest way is by purchasing REITs. These are portfolios of properties that trade on exchanges just like stocks. And they must pay out at least 90 percent of their taxable income as dividends to shareholders, which makes them strong income plays.

There are several REITs in each of the three sectors we discussed—cellphone towers, data centers and healthcare—that have strong historical track records.

If you're not an expert real estate analyst, consider consulting a financial adviser as to which REIT, if any, might be appropriate for you. Factors that affect REIT values include debt, rental rates and occupancy rates.

Interest Rate Implications

One point to keep in mind is that REITs generally rise in value when interest rates fall and fall in value when interest rates rise. REITs are often heavy borrowers to purchase property, so rising rates increase their borrowing costs.

REITs also compete for investors' attention against other securities that offer income, and higher rates can boost the income available from those competing securities.

Many investment experts say that real estate provides important diversification for investor portfolios. So non-traditional commercial real estate REITs may be a welcome addition for those portfolios.

The Bottom Line

Don’t limit your commercial real estate perspective in a time of great change. Think outside the downtown office box and you may just be surprised by the wealth of opportunities you discover.