As one of the hardest hit sectors during the Great Recession, commercial real estate, has been one of the best places to park your money since the recovery began. Broad-based funds like the iShares FTSE NAREIT Real Estate 50 (NYSE:FTY) have soared since their hitting their 52-week lows. The perfect combination of low interest rates, available capital and depressed real estate prices has helped push the sector higher. These factors, combined with retirees looking for high income and inflation protection have continued to prop up prices. However, as the commercial real estate recovery has taken hold, most of the gains have been seen by large cap firms. For investors, that spells opportunity in the smaller REIT sector.

TUTORIAL: Exploring Real Estate Investments

Looking at the Small Fries
The recovery in commercial real estate has been all about the big boys. Their sheer size has given large cap REITs many advantages during the credit crisis. Given their large asset bases and the zero interest rate environment, larger commercial real estate companies have been able to raise more than $150 billion globally in new capital since 2008. Large REITs have been able to refinance debt or issue equity more easily and they've put that capital to use by buying property at cheap valuations. Larger firms have also been able to take over a variety of stalled construction projects. Using these strengths, the average year-to-date return for REITs with market caps larger than $10 billion is over 13%.

On the flipside, smaller REITs have only returned about 4%. In a sector with critical access to capital, (due to REITs 90% tax structure), both retail and institutional investors have favored larger firms. However, with the economy beginning to recover, investors may want to give the small fries a go.

Small-cap REITs have a host of benefits. These include higher income potential and significant capital gains. As investors have flocked to large REITs, distribution yields have fallen. The dividend yield on the mega-weighted iShares Cohen & Steers Realty Majors (NYSE:ICF) is less than 3%. This compares to the Bloomberg REIT Small-cap index, which yields about 5%. In addition, many small-cap REITs are ideal acquisition targets. Larger REITs could look for growth in the current market by buying up these smaller companies. Credit crunch aside, smaller real estate firms historically outperform their larger cousins.

Small-Cap CRE
While there has been a large cap REIT bias as of late, investors looking for higher income from their real estate investment may want to take advantage of the small-cap REIT sector. The sectors current "cheapness" may not last long, as economy and real estate markets continue to improve.

The new IQ US Real Estate Small Cap ETF (Nasdaq:ROOF) follows a basket of 40 different REITs in the small-cap space, including INVESCO Mortgage Capital (NYSE:IVR) and Medical Properties Trust (NYSE:MPW). The ETFs holdings are spread out over a variety of property types. The fund charges 0.69% in expenses, and yields a juicy 6.18%.

For those investors looking for a single small cap real estate play, Urstadt Biddle Properties (NYSE:UBA) (NYSE:UBP) could be a great choice. With consumers beginning to spend a little more, the retail REIT sub-sector is seeing improvements. Urstadt owns a variety of freestanding shopping plazas in economically stable regions in New England. The trust currently owns more than 50 properties, but has recently been opening new open-air shopping centers in the New York metro area, within commuting distance of New York City.

In the most recent quarter, net income for the REIT soared 58% on a 20% increase in revenue. Urstadt currently yields 5.2%, but has increased its dividend every year for the last 17 years. The icing on the cake is continued insider ownership and purchases. Chief operating officer (COO) Willing Biddle recently purchased just over 22,000 more shares, costing nearly $380,000.

The Bottom Line
While large cap commercial real estate has continued its gains throughout 2011, smaller firms seem to be stuck in the mud. For investors looking for higher income and capital gains potential, smaller REITS are a perfect opportunity. The previous ETFs are great examples on how to play small cap commercial real estate. (For more, see 5 Types Of REITs And How To Invest In Them.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  2. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  3. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  4. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  5. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  6. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  7. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  8. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  9. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  10. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. 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 >>
  4. 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 >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... 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!