Active REIT fund managers have tilted allocations toward data centers, telecommunications, residential and healthcare while holding underweight positions in sectors including retail, industrial and office, according to the latest analysis of fund portfolios by Nareit.
The analysis—which compares the portfolios of more than two dozen active REIT fund managers with the compositions of the FTSE Nareit All Equity Index—found active managers were most overweight toward telecommunications (123%), data centers (120%) and residential (117%) while being the most underweight to office (56%), lodging (65%), retail (86%) and industrial (88%). The latest analysis is based on portfolios as of the fourth quarter of 2024.
“You have a large number of active managers that have allocated and you can get a sense of the views of real experts studying the industry full time on the forward-looking prospects by sector,” said John Worth, Nareit executive vice president for research and investor outreach.
On an absolute basis, funds were most heavily allocated to residential REITs, with an aggregate 16% of managed portfolios allocated to that asset class. Healthcare REITs—which capture medical offices, seniors housing and hospital real estate—were the second largest asset class. Those were followed by retail, telecom and data centers. (The distinction is that the retail positions are lower than the FTSE index while telecom and data centers are greater.)
“Residential, even though it remains the largest in terms of total absolute holdings, had been more overweight in funds,” Worth said. “We’ve seen those positions get trimmed stemming on concerns about supply and demand, especially in certain markets.”
The biggest relative changes in allocations from previous periods include health care (with a year-over-year allocation increase of 2.8 percentage points and a quarterly increase of 0.9 percentage points. In addition, for data centers, allocations increased 1.3 percentage points for the quarter and 2.4 percentage points for the year.
Meanwhile, the industrial sector saw the largest annual (3.9 percentage points) and quarterly (1.5 percentage points) declines. Residential (down 1.6 percentage points) and retail (down 1.7 percentage points) also saw a decline in their year-over-year allocation shares.
Timberland REITs are a less heralded sector that also has caught the attention of active managers. Those REITs moved to overweight in the fourth quarter (118%) after being underweight the rest of 2024.
“Timberland is a bit unique among REIT property sectors in the sense that we tend to think about REITs having low correlations to the broader economy because of supply chain issues,” Worth said. “Even if demand for a property type ticks up, you can’t react with new supply on a short-term basis. But timberland is different. It’s more reactive to the macro economy and especially homebuilding. We often see the valuation of timberland and home building trends moving in a relationship to one another.”
In other REIT news, Nareit’s Industry Tracker data for the fourth quarter of 2024 showed that funds from operations reached a record high of $20.9 billion, up 11.4% compared to 2023. Net operating income reached $29.8 billion, up 5.5% year-over-year. In addition, same-store NOI (which only includes properties in REIT portfolios for at least a year) rose 3.2%.
Occupancy of total REIT-owned properties in the four major property classes stood at 93.3%. Retail led (97.0%), followed by apartments (95.7%) and industrial (95.0%). Office was the only sector below 95%, coming in at 86.2%.
“The numbers are really strong on the operational side,” said Ed Pierzak, senior vice president of research at Nareit. In terms of occupancies, “we are starting to level out and find a bottom and even when we compare with private market counterparts, we find that REITs have been performing better, particularly in offices.”
In terms of the gap between NOI and same-store NOI, REITs have been strategic in the past year in both acquisitions and dispositions as they have worked to fine-tune portfolios.
“Like any portfolio manager, they are looking at assets and there could be a variety of reasons why would eliminate a property,” Pierzak said. “Sometimes it’s poor current performance or maybe future prospects aren’t ideal. Or maybe they’ve done quite well with a property and there’s not much more left and they sell to take gains."
