Non-Traded REITs on the Upswing

By Jeff Hanson, Grubb & Ellis Equity Advisors:
The market for non-traded REITs has roared back this year following a precipitous decline during the depths of the recent recession.

The market for non-traded REITs has roared back this year following a precipitous decline during the depths of the recent recession. Indeed, in 2007 non-traded REITs raised nearly $11.5 billion in investor equity, followed by a still vibrant $9.7 billion in 2008. Following the economic meltdown at the end of 2008, however, the equity raise for 2009 declined precipitously to just over $6 billion.

Despite what has proven to be a decidedly tepid recovery for much of the economy during 2010, fundraising among non-traded REIT sponsors has resumed a vigorous pace with the sector expected to raise approximately $8 billion in 2010. The reason for this resiliency is pretty fundamental – investing in commercial real estate at this point in the market cycle is simply a smart thing to do.

Institutional investors routinely allocate a significant percentage of their equity to direct ownership in commercial real estate. Non-traded REITs allow individual investors to also participate directly in this key investment sector. Perhaps the two most important features that draw investors to non-traded REITs is their potential for steady income and general lack of volatility compared to publicly traded equities.

Certainly, not all non-traded REITs are created equal. Strength of the sponsor company, quality of the management team, investment strategy/sector and underlying governance elements are important factors that informed investors and their financial advisors should explore before choosing to invest in a non-traded REIT. But, in general, all non-traded REITs seek to protect investor principal while providing investors with steady distributions and eventual capital appreciation. Typical distribution levels for most non-traded REITs range between 5 percent and 7 percent.

In addition to the potential for consistent income, non-traded REIT investors appreciate the fact that they lack the volatility of their publicly traded cousins and other investments that are subject to the unpredictable swings of the market. Non-traded REITs are long-term investments with multi-year holding periods. While liquidity is typically a prized investment attribute, many investors are happy to trade liquidity for reduced volatility, particularly following the tumultuous ride they’ve experienced in the public markets in recent years.

As the aging baby boomers begin their retirement years, look for non-traded REITs to continue to gain popularity. The potential for consistent income and the lack of volatility compared to traded equities are attributes prized by this active generation of Americans. Non-traded REITs will increasingly comprise a growing portion of their investment portfolios.