The real estate sector has slid in 2023. But investors searching for bargains in the group have plenty to pick from. They also need to be mindful of the difference between value and value traps. Some of the most depressed valuations and credible value opportunities are found among office and commercial real estate investment trusts (REIT).
REITs are the real estate subgroups emphasized by the VanEck Office and Commercial REIT ETF (DESK ). The fund debuted last month. It could prove appropriately timed. This is because more market participants awaken to the value proposition offered by commercial and office REITs.
A confluence of factors are conspiring to hamper commercial REITs. This includes some DESK holdings. However, those issues are widely priced into REITs. This could indicate there may be opportunity for patient investors with assets such as DESK.
Commercial REIT ETF DESK Value Proposition
Dozens of REIT equities can credibly be considered undervalued or deeply undervalued. That includes some DESK holdings such as Kilroy Realty (KRC).
Kilroy owns office and mixed-used real estate in attractive markets. These markets include Los Angeles, San Diego, the San Francisco Bay Area, Seattle, and Austin. Kilroy, which accounts for 9.22% of the DESK roster, stands to benefit from long-term demand for life sciences real estate.
“Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast,” noted Morningstar analyst Suryansh Sharma. “The company’s strategy is to achieve long-term maintainable growth by developing and owning the highest-quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years, compared with 30 years for peers.”
Another DESK holding with strong value traits is Realty Income (O), which accounts for about 4% of the ETF’s weight. That REIT has long been a force in office real estate. Its portfolio is diversified, as highlighted by recent transactions involving the purchases of casino real estate. This includes outright ownership of the property of Encore Boston Harbor and a recent deal to acquire an almost 22% stake in the real estate of the Bellagio on the Las Vegas Strip.
Realty Income’s gaming real estate exposure is meaningful. This is because those tenants are among the least likely to miss rent payments or default on lease obligations.
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