Amid concerns about the strength of the office property market and delays to the Federal Reserve’s interest rate reduction plans, some investors may be passing on real estate investment trusts (REITs) and related trusts.
In theory, that’s a logical move. REITs are rate-sensitive assets, and many of the passively managed ETFs in this category are heavily allocated to the weaker corners of this sector. However, even when considering those factors, there’s a case for active management with REITs. That’s accessible via the ALPS Active REIT ETF (REIT ).
One of the advantages of active management in the real estate sector is that without the confines of index rules, fund managers can not only avoid potential trouble spots but also delve into some of the sector’s more compelling segments. Those include data center REITs, which account for about 12% of the REIT portfolio.
Data Centers Could Be Long-Term Drivers for REITs
Due to the expansion of growth industries such as cloud computing, demand for data centers has jumped significantly in recent years. Alone, that’s a potential tailwind for some REIT holdings, but the data center demand outlook could be fortified by artificial intelligence (AI) and other digital opportunities.
According to Nareit, “The demand conditions supporting data centers, telecommunications towers, and other digitally driven real estate are global in nature and will continue to drive growth in these sectors.”
Data center REITs include Equinix (EQIX), the REIT’s largest holding, and Digital Realty (DLR), another member of the ETF’s roster. Those property firms are racing to meet demand from clients such as Alphabet, Amazon, and Microsoft, among other AI leaders.
Adding to REIT’s data center proxy allure is the point that Equinix and Digital Realty are already equipped to meet AI demand because of their established exposure to cloud computing – an industry that intersects with AI.
“Major cloud providers are driving a wave of demand for massive blocks of data center capacity in U.S. markets as they race to secure the infrastructure to support AI, an arms race that has already led to record leasing and a larger-than-ever development pipeline. While a growing number of privately backed developers specialize in delivering this kind of capacity, the two remaining public data center REITs are competing for this turf too,” says Dan Rabb for BisNow.
REIT’s exposure to office REITs is less than 6% — a positive trait in the current environment and one that could signal active management works in this sector.
For more news, information, and analysis, visit the ETF Building Blocks Channel.
