Real estate investment trusts provide investor inflation protection

After being hobbled by the pandemic recession, real estate investment trusts are rebounding rapidly, and the economic recovery isn’t the only thing driving growth this year.

Share prices are rising from demand rooted in investor concerns about inflation and the potential for rising interest rates. As a result, the S&P U.S. REIT Index is one of the best performing parts of the stock market this year, up 27.9% through July 27.

While some types of REITs weren’t even nicked by the pandemic — including cell towers, data centers and marijuana properties — those that rely on people congregating were crushed by quarantining: retail stores, medical space, apartments, hotels and office buildings.

But this year, these REITs have grown apace from highly beneficial market conditions.

Rising construction costs are limiting the growth of leased space, giving existing properties a competitive edge. And to keep up with inflation, these landlords are using their standard tool of so-called escalator clauses to raise rents automatically in long-term leases.

These conditions make REITs especially appealing for investors concerned that continued inflation may lead to rising interest rates, significantly lowering valuations of some stocks. Thus, REITs are an alternative investment useful for diversifying equity portfolios.

The performance of these companies this year gives them new allure as a option for share price growth, in addition to their longstanding appeal of substantial dividends  — a good reason in itself to own them. A special tax status requiring payouts of 90% of profits to shareholders results in dividends as high as 4% to 6% (and sometimes higher), making them an attractive alternative to bonds in this period of rock-bottom bond yields.

While share prices in most categories are up substantially this year — for example, retail and residential, by more than 33% — others, such as hotels and offices, are in earlier stages of rebounding. Yet, these and other categories still have room to grow.

Here are the current scenarios for these categories:

• Retail REITs are up 35.9% in the first half of this year. Though online retailing was hurting bricks-and-mortar stores well before the pandemic, declarations of shopping malls’ doom from Amazon seem overstated now that mall foot traffic is increasing from pent-up demand. And ironically, Amazon is now leasing some of the mall anchor stores it’s credited with killing off, using them for last-mile delivery hubs. Category examples: Simon Property Group, the largest mall group in the country, and Realty Income Corp., which owns a wide range of retail properties.

• Apartments are up 37.7%. With tenants going back to work and moratoriums on evictions over, these REITs are positioned to benefit from rising demand. The nation needs about 2 million new homes…