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My 3 Favorite REITs Right Now

By Matthew Frankel, CFP® – Dec 15, 2021 at 6:23AM

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Here are three great choices for growth and income as we head toward 2022.

If you follow the stock market regularly, you've almost certainly noticed that volatility has picked up lately. From the omicron variant uncertainty to fears about inflation, investors are more on edge than they were just a couple months ago.

If you're worried about market volatility or just want to offset some of the ups and downs of the growth stocks in your portfolio, the real estate sector could be a great place to look. Real estate investment trusts, or REITs, tend to be less volatile than the overall stock market and still offer excellent long-term total return potential. I own about a dozen REITs in my personal stock portfolio for precisely these reasons. Here are my three favorites right now.

Low-rise apartment buildings.

Image source: Getty Images.

When demand exceeds supply, investors win

American Campus Communities (ACC) is the only REIT exclusively focused on student housing. It pioneered the purpose-built student housing industry when CEO Bill Bayless founded the company in 1993. American Campus owns or operates 166 student housing communities, most of which are located either on campus or a very short distance away from their target universities.

Recently, American Campus has showed just how resilient its business is. Its fall 2021 occupancy came in at 95.8%, exceeding the high end of the company's own expectations, and rent growth was better than expected too. What's more, the student housing industry (especially when it comes to on-campus properties) is still in its relative infancy, so there could be tons of room to grow in the years to come.

American Campus Communities offers a 3.4% dividend yield and has handily outperformed the S&P 500 in the 17 years since it went public -- and there's no reason to believe the strong performance will end anytime soon. In fact, the number of college applicants grew by 13% this year, and experts anticipate the lowest level of new student housing inventory coming to the market in more than a decade in 2022.

A leader with long-tailed growth potential

Data center REIT Digital Realty Trust (DLR 5.18%) is one of the largest real estate stocks of any kind in the market and owns more than 280 data centers all around the world.

If you aren't familiar, think of data centers as the physical "homes" of the internet. When you access a cloud-based application or upload photos to your social media, all of that data has to live somewhere, and that's where data centers come in. These are facilities built to house servers and other networking equipment in a secure, reliable environment. Meta Platforms (META 1.97%), Oracle (ORCL 2.66%), and JPMorgan Chase (JPM 1.21%) are just a few examples of the more than 4,000 customers that rely on Digital Realty.

The volume of data flowing around the world has grown exponentially in recent years, and all signs point toward this trend continuing. Data-heavy technologies like artificial intelligence, augmented reality, and autonomous vehicles are growing rapidly, and the gradual rollout of 5G technology around the world should keep data volumes rising.

A highly profitable retail REIT with room to grow

Tanger Factory Outlet Centers (SKT 4.69%) owns a portfolio of 39 open-air outlet shopping centers in the U.S. and Canada. The company has struggled in recent years. Even before the COVID-19 pandemic, brick-and-mortar retail was under serious pressure from e-commerce competitors, and when the pandemic hit, several of Tanger's largest tenants went bankrupt.

However, we're finally starting to see Tanger's business turn a corner. Occupancy increased from less than 93% at the end of 2020 to 94.3% at the end of the third quarter. More impressively, Tanger reported tenant sales of $448 per square foot of space, which is 13% higher than pre-pandemic levels and an all-time high.

With a rock-solid balance sheet and lots of room for the outlet industry to grow, Tanger could be getting set for an expansion period -- which means investors could be handsomely rewarded.

Invest with the long term in mind

As a final thought, I should emphasize that while these are somewhat timely investments, REITs like these are designed to be long-term investments. There is simply too much that can influence their share prices over the short term. These are three well-run, highly profitable businesses that could deliver market-beating returns over time, so invest with that in mind.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP® owns American Campus Communities, Digital Realty Trust, and Tanger Factory Outlet Centers. The Motley Fool owns and recommends American Campus Communities, Digital Realty Trust, and Meta Platforms, Inc. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.

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