Real estate investment trusts (REITs) had a rough year along with most of the market in 2008. The worst ride for the group had to be for those that owned shopping malls, as the combination of the credit crisis affecting commercial borrowing and the consumer slowdown in shopping provided a one-two whammy that punished the stock prices as the underlying businesses struggled. (For insight on this income security that rivals small-cap stocks, read What Are REITs?)

Oh, Those Empty Malls
If you were at a mall this year, and from the numbers, not enough shoppers were, you probably noticed the growing number of empty and vacant stores. Even Simon Property Group (NYSE:SPG), the number-one mall REIT in USA, showed the effects of this climate, with its stock price falling from over-100 down into the 30s, before recently closing over $50, yet its earnings still held up fairly well. They are a solid company, though, and have weathered the storm so far.

Another big mall owner, the Westfield Group (OTC:WFGPY), also showed similar effects of the downturn in the economy in its stock price. Taubman Centers (NYSE:TCO) fared much the same. And so it went for most of the REITs which had large exposure to shopping malls.

Two REITs With a Different Look
Equity One (NYSE:EQY) and Boston Properties (NYSE:BXP) are two REITs that had hard years as stocks, yet their earnings were reasonably good, though Equity One had a recent negative quarter. Equity One has a slightly different mix of properties than the others, as it owns neighborhood and community shopping centers rather than the large indoor malls. These types of strip centers are doing better than the malls generally, and give the REIT more flexibility in terms of leasing, with a potentially more favorable mix of tenants. Boston Properties, on the other hand, is an office-building and commercial REIT, so its exposure is entirely different, yet it, too, showed the decline in stock price and the tough sledding as all other categories of REITs did.

Commercial Property and Its Paper
The shopping mall REITS suffered in addition to the consumer-whammy, (or in the case of office REITs, the reluctance of businesses to expand or renew office-space leases), from the credit crunch in the commercial mortgage backed securities' (CMBS) markets, where REITs often do their financing. REITs need access to this market for capital to build, buy or refurbish the commercial properties they lease.

Dividend Plays?
One thing you might notice when looking at REITs is that most of them are paying a high dividend. This ranges from about 5-10%, which is historically somewhat high due to their depressed stock prices. While an unusually high dividend is sometimes an indicator of distressed companies, this is not the case for the REITs right now; it is more a function of a beaten-down group of stocks, which have also attracted the short sellers. Still, with the credit crunch and consumers holding off on spending, these stocks and the fundamentals of their underlying companies should be watched carefully before buying.

A Hint of Hope?

Despite predictions that the commercial credit market will still be a tough environment for 2009, and that the recession will continue to hold down consumer spending and business expansion so that REIT stock prices may remain depressed, there are kernels of possible good news. The recent finding that we may already be midway through the recession rather than only at the beginning of it, as well as the possible gradual thaw of the commercial credit markets, may augur well for a rebound in these stocks beginning next year. One REIT, Westfield, has already predicted a positive increase in its earnings projections for the end of this year. So, despite some otherwise bleak predictions for them, 2009 may turn out instead to be a happier year for REITs.

For further reading on this investment product, see our related article The REIT Way.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  4. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  5. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  6. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  7. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  8. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  9. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  10. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  1. The New Deal

    A series of domestic programs designed to help the United States ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. How does the risk of investing in the industrial sector compare to the broader market?

    There is increased risk when investing in the industrial sector compared to the broader market due to high debt loads and ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!