Experienced real estate investors know that one of the primary fundamental measures of strength is occupancy rate. Those market participants also know that owing to the depth of the real estate sector, occupancy rates aren’t linear across the space. But those metrics are important in all subgroups.
The extent to which landlords are filling space is also pertinent to investors evaluating ETFs such as the ALPS Active REIT ETF (REIT). The fund is an actively managed ETF with exposure to seven groups of real estate investment trusts (REITs). That number can change due to REIT being actively managed, but what doesn’t change is the importance of occupancy rates.
Following the coronavirus pandemic, much attention has been paid to declining occupancy rates in office buildings in some cities. That was a byproduct of the work-from-home trend caused by the global health crisis. However, occupancy rates in other REIT segments remain solid, and the ALPS ETF is responsive to that trend.
REIT Exposures Matter
As noted above, REIT has exposure to seven corners of the real estate sector. Some of those are among the best when it comes to high levels of leased space.
“Occupancy rates are indicators of property fundamentals that reflect the interaction of supply and demand. Focusing on the four traditional property types, recent data indicate that, on average, REIT industrial, apartment, and retail occupancy rates have continued to exceed 95%,” according to Nareit research. “Apartment, retail, and office REITs have also enjoyed higher occupancy rates than their private market counterparts.”
That sentiment is potentially constructive for REIT. That’s because residential, retail, and industrial REITs are the second- through fourth-largest industry weights in the ETF. They combine for more than 47% of the fund’s weight. Industrial REITs, which account for 13.07% of the ETF’s roster, have been a source of occupancy strength. And that’s a trend that could continue over the long term.
“Although REIT industrial occupancy rates have been lagging, they have maintained exceptionally high levels. As of the first quarter of 2024, the REIT industrial occupancy rate averaged 96.1%,” added Nareit.
Owing to housing shortages in some parts of the U.S. and easier pathways to regulatory approvals for apartments, apartment REITs have been occupancy rate stalwarts in the residential REIT space. That segment accounts for 17.53% of REIT’s roster. That segment has posted occupancy rates that compare well to the broader open-end diversified core equity space.
“Overall, the average public-private difference was 0.9%. As of the first quarter of 2024, Nareit T-Tracker and NCREIF ODCE posted average apartment occupancy rates of 95.8% and 93.7%, respectively,” concluded Nareit.
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