In this article, we discuss the 12 best commercial real estate stocks to buy according to hedge funds. If you wish to skip our detailed analysis of the real estate market, check out the 5 Best Real Estate and Realty Stocks to Buy According to Hedge Funds.
The real estate sector stands as a highly profitable industry globally, with its significance further emphasized by the interdependence between real estate development and some of the world’s largest economies. Naturally, this also means that the industry is closely monitored by both governments and the wealthy. Encompassing various intricate facets, including the acquisition, sale, and administration of diverse properties such as residential homes, commercial buildings, and industrial spaces, the real estate industry involves a multitude of participants, ranging from real estate agents and brokers to property developers, landlords, property managers, real estate investment trusts (REITs), and financial institutions.
According to a report, the global real estate industry was valued at $3.69 trillion in 2021. Despite its substantial size, the segment is projected to achieve a compounded annual growth rate (CAGR) of 5.2% from 2022 to 2030, reaching an estimated worth of $5.85 trillion by the conclusion of the forecast period. In addition to the residential sector, the commercial real estate (CRE) market constitutes a significant portion of the industry. More specifically, commercial real estate outperformed inflation in six of the seven inflationary periods and outperformed its own historical average in five of them. After enduring losses caused by the COVID-19 pandemic, returns in the CRE sector have experienced a partial recovery, accompanied by the resurgence of inflation. It is expected to mirror the overall growth rate of the sector, with a projected CAGR of 5.1% throughout the forecast period. Additionally, McKinsey states that commercial real estate returns have demonstrated strong performance over the seven inflationary periods spanning from 1980 to 2022, achieving an annualized rate of 11.7%. Notably, they have consistently outperformed inflation, and even outshined other asset classes such as the S&P 500 and BBB corporate bonds.
However, all is not well in the CRE market. According to Bloomberg, the top US bank regulators are asking lenders to work with credit-worthy borrowers that are facing stress in the commercial real estate market. With the sharp increase in borrowing costs, property owners are facing immense pressure, leading to defaults on debt by companies such as Brookfield Corporation. The situation is particularly challenging for office owners, as elevated borrowing costs make financing more difficult, and tenants are scaling back due to layoffs and the growing trend of remote work. According to the latest guidance, banks are advised to offer short-term loan accommodations to borrowers. These accommodations may involve deferring payments, accepting partial payments, or providing other forms of assistance. In this environment, lenders are now faced with challenging negotiations as approximately $1.4 trillion of commercial real estate loans are due this year and next. Following this, major institutional owners including Blackstone Inc. (NYSE:BX), Brookfield and Pimco have already chosen to stop payments on some buildings, stating that they have “better uses for their cash and resources”.
The real estate industry is currently engaged in a significant debate regarding the future occupancy of vacant office buildings in various cities. As an example, cities such as San Francisco and Chicago are experiencing office vacancy rates approaching 25%. This has resulted in a decline of 50% in office real estate stocks compared to pre-Covid levels, while the REIT sector has experienced a 9.5% loss in the past year, in contrast to the S&P 500’s 14.5% gain. However, it’s important to note that offices now represent only 3.4% of the $1 trillion public market for real estate investment trusts (REITs), and the broader REIT space is not facing the same level of challenges.
On the other hand, the residential real estate (RRE) market seems to be faring somewhat better. Following a significant decline in new home prices, which dropped by 10% from their highest levels reached in February 2023, the prices are on an upward trend with the latest reading of April 2023. Furthermore, the regional housing index provided by the National Association of Home Builders/Wells Fargo contributes to this positive trend. The most recent reading for June indicates a sixth consecutive month of growth, with the index standing at 55. See also our list of the 10 Best Residential Real Estate Stocks To Buy.
The real estate industry is currently experiencing transformative shifts due to technological advancements and enhanced capital availability. Most notably, investors looking to delve into the real estate market should be prepared for the ways online property listing platforms, smartphone apps, virtual reality, and blockchain technology will impact all aspects of real estate transactions. Based on a report, investors can anticipate an increase in competition among property listing websites in the near future, all striving to facilitate seamless buying and selling experiences for aspiring and current property owners. While platforms such as Zillow Group, Inc. (NASDAQ:Z) have long held a dominant position in the market, new and similar platforms will continue to emerge, further intensifying the competition. Technology will seemingly play a substantial role in the future of the real estate market, and major players will learn to maneuver the market accordingly, or they risk lagging behind the competition, of which there is plenty.
With these details in mind, let’s take a look at some of the best commercial real estate stocks to buy according to hedge funds, out of which the top ones include the likes of Equinix, Inc. (NASDAQ:EQIX), American Tower Corporation (NYSE:AMT), and Prologis, Inc. (NYSE:PLD).
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Our Methodology
We selected the following real estate stocks based on the hedge fund sentiment toward each stock. We have assessed the hedge fund sentiment from Insider Monkey’s database of 943 elite hedge funds tracked as of the end of the first quarter of 2023. The list is arranged in ascending order of the number of hedge fund holders in each firm.
12. Public Storage (NYSE:PSA)
Number of Hedge Fund Holders: 32
Public Storage (NYSE:PSA) is a fully integrated, self-administered, and self-managed American REIT that primarily acquires, develops, owns, and operates self-storage facilities. The largest brand of self-storage services in the US, the company was re-structured as a publicly traded REIT in 1995, when Storage Equities merged with Public Storage and adopted its name.
Public Storage (NYSE:PSA) has exhibited remarkable market performance as of June 28, 2023, surpassing the average by an impressive 3.4% annually over the past two decades. This equates to an impressive average yearly return of 11.0%.
Insider Monkey’s Q1 2023 survey of 943 hedge funds revealed that 32 had held a stake in Public Storage (NYSE:PSA). Out of these, Jeffrey Furber’s AEW Capital Management is the firm’s largest investor since it owns 421,920 shares that are worth $127.48 million.
Baron Real Estate Fund made the following comment about Public Storage (NYSE:PSA) in its first quarter 2023 investor letter:
“Self-Storage REITs that offer a compelling combination of scale and cost of capital advantages, low capital expenditure requirements, strong balance sheets, and monthly leases that provide an opportunity for landlords to increase rents to combat inflation. Examples: Public Storage (NYSE:PSA) and Extra Space Storage Inc.
Public Storage Incorporated is the world’s largest owner, operator, and developer of self-storage facilities. Public Storage has achieved the #1 market position in 14 of its top 15 markets and is widely recognized as the leading self-storage company with a premier brand.
It is currently valued at a 5.7% implied capitalization rate or a 20% discount to its estimated net asset value.”
Much like Equinix, Inc. (NASDAQ:EQIX), American Tower Corporation (NYSE:AMT), and Prologis, Inc. (NYSE:PLD), Public Storage (NYSE:PSA) is a real estate stock that hedge funds favor.
11. Alexandria Real Estate Equities, Inc. (NYSE:ARE)
Number of Hedge Fund Holders: 33
Alexandria Real Estate Equities, Inc. (NYSE:ARE) is an American real estate investment trust that invests in office buildings and laboratories leased to tenants in the life science and technology industries. The company also has a venture capital arm, Alexandria Venture Investments, which invests in life sciences firms. On June 5, Alexandria Real Estate Equities, Inc. (NYSE:ARE) declared a $1.24 per share quarterly dividend, a 2.5% increase from its prior dividend of $1.21. The dividend is payable on July 14, to shareholders of record on June 30.
According to Insider Monkey’s first quarter database, 33 hedge funds held stakes worth $284.5 million in Alexandria Real Estate Equities, Inc. (NYSE:ARE), compared to 29 funds in the prior quarter holding stakes valued at $296 million. Ian Simm’s Impax Asset Management is the largest position holder in the company.
Baron Real Estate Fund made the following comment about Alexandria Real Estate Equities, Inc. (NYSE:ARE) in its first quarter 2023 investor letter:
“Alexandria Real Estate Equities, Inc. (NYSE:ARE) is the leading landlord and developer for the life science industry. Alexandria is a best-in-class company with several competitive advantages including an irreplaceable life science office portfolio concentrated in the premier life science markets in the U.S. and deep customer relationships.
Alexandria is valued at a 6.4% implied capitalization rate versus recent life science real estate transactions that have been valued in the 4% to 5% range. Alexandria’s real estate is attractively valued at approximately $500 per square foot versus private market transactions for life science real estate in the $1,000 to $1,500 per square foot range.
The shares of Alexandria Real Estate Equities, Inc., the only pure-play publicly traded landlord and developer to the life science industry, declined in the first quarter of 2023, alongside most traditional office REITs…” (Click here to read the full text)
10. Simon Property Group Inc. (NYSE:SPG)
Number of Hedge Fund Holders: 35
Simon Property Group, Inc. (NYSE:SPG) is an American real estate investment trust that invests in shopping malls, outlet centers, and community/lifestyle centers. Recognized as the largest owner of shopping malls in the United States, reported a GAAP EPS of $1.38 for FQ1 2023, beating market estimates by $0.05. Additionally, the firm reported a revenue of $1.35 billion, surpassing forecasts by $84.38 million.
Haendel St. Juste, an analyst at Mizuho, provided a Neutral rating for Simon Property Group, Inc. (NYSE:SPG) on May 26, but adjusted the price target downward from $116 to $106. While maintaining an Equal-weight stance on shopping centers as a whole, the analyst foresees the potential for increased earnings if bad debt remains minimal and transaction activity improves during the latter part of 2023.
According to Insider Monkey’s first quarter database, 35 hedge funds were bullish on Simon Property Group, Inc. (NYSE:SPG), compared to 33 funds in the preceding quarter. Jeffrey Furber’s AEW Capital Management is a prominent stakeholder of the company, with 495,805 shares worth $55.5 million.
9. VICI Properties Inc. (NYSE:VICI)
Number of Hedge Fund Holders: 39
VICI Properties Inc. (NYSE:VICI) is a real estate investment trust specializing in casino properties that was formed in 2017 as a spin-off from Caesars Entertainment Corporation as part of its bankruptcy reorganization. One of the largest owners of gaming properties in the United States, the company’s diverse range of properties include casinos, hotels, restaurants, and other entertainment venues. On June 8, the company declared a $0.39 per share quarterly dividend, in line with previous. The dividend is payable on July 6, to shareholders of record on June 22.
On May 1, Ladenburg raised its price target on VICI Properties Inc. (NYSE:VICI) to $37 from $34.50 and reiterated a Buy rating on the shares of the company.
According to Insider Monkey’s first quarter database, 39 hedge funds were long VICI Properties Inc. (NYSE:VICI), compared to 40 funds in the earlier quarter. As of March 31, Citadel Investment Group is the largest stockholder in the company and has a stake worth 319.7 million.
Baron Funds made the following comment about VICI Properties Inc. (NYSE:VICI) in its Q4 2022 investor letter:
“We remain optimistic about the Fund’s triple net gaming REIT investments in VICI Properties Inc.(NYSE:VICI) and Gaming and Leisure Properties, Inc. The companies primarily own quality casino and gaming real estate properties. They have attractive dividend yields in the 5% to 6% range that are well covered, accretive acquisition growth opportunities, and are, in our opinion, attractively valued.
We remain mindful of the rising interest rate environment and the possibility that higher debt costs and lower equity prices could negatively impact the ability for net lease REITs to invest in an accretive fashion.”
8. Equinix, Inc. (NASDAQ:EQIX)
Number of Hedge Fund Holders: 39
Equinix, Inc. (NASDAQ:EQIX) is an American multinational company headquartered in Redwood City, California, that specializes in Internet connection and data centers. A leader in the global colocation data center market, Equinix, Inc. (NASDAQ:EQIX) provides businesses access to crucial locations, strategic partners, and opportunities that enable swift and efficient expansion of their digital services.
According to Insider Monkey’s Q1 data, 39 hedge funds were long Equinix Inc (NASDAQ: EQIX), compared to 38 funds in the prior quarter. Ian Simm’s Impax Asset Management is the biggest position holder in Equinix Inc (NASDAQ:EQIX), with approximately 639,582 shares worth $460.65 million.
In its Q4 2022 investor letter, ClearBridge Investments, an investment management company, mentioned Equinix, Inc. (NASDAQ: EQIX). Here is what the fund said:
“Real estate holdings Equinix, Inc. (NASDAQ:EQIX) and Prologis (PLD) were standouts in a sector challenged by materially higher interest rates. Equinix is a best-in-class data center REIT with record leasing and backlog and a conservative balance sheet that should position it well in a downturn. Logistics real estate, meanwhile, has some of the most attractive market dynamics of all real estate subsectors, and Prologis is a clear leader within the group. Logistics real estate should continue to benefit from secular tailwinds of rising e-commerce penetration, ever faster delivery times, and supply chain resiliency (“just in case”).”
7. CBRE Group, Inc. (NYSE:CBRE)
Number of Hedge Fund Holders: 41
One of the world’s largest commercial real estate services and investment firms, the CBRE Group Inc. (NYSE:CBRE) provides a wide range of services such as property management, investment management, valuation and appraisal, market research, and consulting. On April 27, CBRE Group, Inc. (NYSE:CBRE) reported a Q1 non-GAAP EPS of $0.92 and a revenue of $7.41 billion, outperforming Wall Street estimates by $0.02 and $320 million, respectively.
Chandni Luthra, an analyst at Goldman Sachs, maintained a Buy rating on CBRE Group, Inc. (NYSE:CBRE) on April 10 but reduced the price target for its shares from $103 to $90. The analyst highlighted the added hurdles in property transactions due to the current macroeconomic climate, making the recovery of commercial real estate more challenging in the latter part of 2023.
According to Insider Monkey’s first quarter database, 41 hedge funds were bullish on CBRE Group, Inc. (NYSE:CBRE), compared to 38 funds in the prior quarter. Harris Associates is the biggest stakeholder of the company, with 13.4 million shares worth $978.7 million.
6. SBA Communications Corporation (NASDAQ:SBAC)
Number of Hedge Fund Holders: 42
SBA Communications Corporation (NASDAQ:SBAC) operates as a Real Estate Investment Trust (REIT) and holds ownership of wireless infrastructure across multiple regions including the United States, Canada, Central America, South America, and South Africa. The company plays a critical role in the wireless industry by providing essential infrastructure services and solutions to wireless carriers. These offerings encompass tower leasing and management, small cell solutions, and fiber solutions. The firm recently reported strong Q1 results and raised its guidance for 2023, anticipating an adjusted FFO per share with a range from $12.55 to $12.91 for the year. This outlook surpasses the consensus estimate of $12.16.
Insider Monkey’s database of 943 hedge funds shows that 42 hedge funds had stakes in SBA Communications Corporation (NASDAQ:SBAC) as of the end of the first quarter of 2023. Of these, Ric Dillon’s Diamond Hill Capital is the largest stakeholder, with 577,417 shares valued at $150.74 million.
SBA Communications Corporation (NASDAQ:SBAC) joins the ranks of Equinix, Inc. (NASDAQ:EQIX), American Tower Corporation (NYSE:AMT), and Prologis, Inc. (NYSE:PLD) as one of the best real estate company based on hedge fund sentiment.
Click to continue reading and see 5 Best Real Estate and Realty Stocks to Buy According to Hedge Funds.
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Disclosure: None. 12 Best Real Estate and Realty Stocks to Buy According to Hedge Funds is originally published on Insider Monkey.
