VNQ: More to Commercial Real Estate than Office REITs
Stock Analysis & Ideas

VNQ: More to Commercial Real Estate than Office REITs

Story Highlights

Despite initial pandemic-related concerns, diversified commercial real estate stocks like Vanguard Real Estate ETF (VNQ) are demonstrating resilience and promise due to diverse holdings such as industrial properties, retail units, and more, offering investors a profitable investment avenue with an appealing hedge against inflation and consistent dividends.

Sentiment about commercial real estate stocks has plummeted since the COVID-19 pandemic, which spurred the rise of remote work. With large parts of the population still working from home, many downtown office buildings and suburban office parks, once teeming with activity, now host a fraction of the workers they once did. Thus, many investors question their viability going forward.

However, it’s important to remember that there’s much more to commercial real estate than office buildings — the category also includes industrial properties (many of which have done well in the wake of the pandemic and the advent of the work-from-home era), retail properties which are reinventing themselves and finding a new lease on life, and more. 

The Vanguard Real Estate ETF (NYSEARCA:VNQ) invests across the whole spectrum of real estate, including commercial and residential, giving investors a diversified approach to the sector. Investing in real estate is appealing because it can act as a hedge against inflation and because many REITs pay investors sizable dividends.   

Investing Across a Broad Spectrum

VNQ owns stocks from all across the spectrum of U.S. real estate, with 166 total holdings. Its top ten holdings account for 48.6% of the fund.

Below is an overview of VNQ’s top ten holdings using TipRanks’ holdings tool

VNQ’s largest holding is a Vanguard mutual fund that also invests in real estate, the Vanguard Real Estate II Index Fund (VRPTX), which accounts for 12.5% of holdings. 

Beyond this top holding, VNQ exposes investors to various types of real estate. Telecom tower REITs make up the fund’s largest weighting at 14.3%, followed closely by industrial REITs at 13.3% and retail REITs at 12.6%.  

Prologis (NYSE:PLD), a high-profile industrial REIT, is the second-largest holding, making up 8.1% of the fund. E-commerce growth accelerated during the pandemic, causing demand for warehouse space to spike, benefitting Prologis and its peers. Prologis is now the largest REIT by market cap by a considerable margin, indicating its dominant position in this vital part of the economy.

Mobile tower REITs are also well-represented in VNQ’s top holdings, with large positions in American Tower Corporation (NYSE:AMT), Crown Castle International (NYSE:CCI), and SBA Communications (NASDAQ:SBAC). Demand for mobile service and data will only continue to grow, so the services provided by these tower providers will continue to be essential for the foreseeable future. In fact, American Tower, which has an 8.1% weighting in VNQ, is now the second-largest REIT in the United States, trailing only Prologis.

The fund’s third-largest holding, Equinix (NASDAQ:EQIX), represents another type of REIT that VNQ offers substantial exposure to — data center REITs, which make up a 7.6% weighting in the fund. Equinix is the third-largest REIT by market value. As more activity and commerce are conducted online, the need for data storage should continue to increase for a long time. Investor sentiment towards artificial intelligence (AI) is red hot, and data centers are a key part of the AI story. Just outside the top ten holdings, Digital Realty Trust (NYSE:DLR) is another prominent data center REIT in VNQ’s portfolio.

But VNQ doesn’t stop there — it also owns storage REITs like Public Storage (NYSE:PSA) and Extra Space Storage (NYSE:EXR), gaming and leisure properties like Vici Properties (NYSE:VICI), and even the largest timberland REIT, Weyerhauser (NYSE:WY). Vici owns gaming and casino properties, as you might expect since it was spun off from Caesars Entertainment in 2017, but it is also increasingly branching out into other types of experiential properties like golf courses and waterparks.

Other interesting holdings include Alexandria Equities (NYSE:ARE), which specializes in commercial properties for tenants in the technology and life sciences fields, and Simon Property Group (NYSE:SPG), a premier owner of shopping malls that is finding different ways to revamp and revitalize its traditional mall spaces.

Lastly, there are plenty of plain vanilla residential REITs, like AvalonBay Communities (NYSE:AVB), and diversified REITs, like Realty Income (NYSE:O), which own both commercial and residential real estate.

If an investor wanted to gain exposure to all of these themes, they would need to own dozens of stocks, but VNQ enables investors to invest in all of them through one ETF.

Healthy Dividend

As one would expect from a real estate ETF, VNQ pays a substantial dividend and currently yields 4.3%. This trumps the average yield of the S&P 500 (currently just a meager 1.6%) and also beats the 3.6% yield of ten-year treasuries. Furthermore, VNQ has a strong track record as a dividend payer, paying dividends to its holders for 17 consecutive years.

Favorable Fee Structure

Additionally, VNQ charges relatively minimal fees, with an expense ratio of just 0.12%. This means that an investor putting $10,000 into VNQ would pay just $12 in fees during the first year. Assuming a 5% return on the investment annually, this investor would pay just $39 in fees over three years, $68 over five years, and $154 after ten years. Vanguard is known for its low fees, and the advantage of investing in a low-cost vehicle like this is that costs aren’t taking a big bite out of your principal over time.

Is VNQ a Buy? 

Meanwhile, sell-side analysts view VNQ favorably, collectively assigning it a Moderate Buy rating. The average analyst price target of $93.20 implies 14.1% upside from the ETF’s current price. 

Of the 868 analyst ratings on VNQ, 49.8% are Buy ratings, 41.8% are Hold ratings, and 8.4% are Sell ratings. The highest analyst price target of $103.4 represents a potential upside of 29.3%. Note that the lowest analyst price target of $83.70 is actually above the ETF’s current price of $80, implying that the downside may be limited. 

Investor Takeaway – Commercial Real Estate is a Diverse Asset Class

Investor sentiment towards commercial real estate is low, but it’s important to note that this is a broad, diverse asset class and that segments within commercial real estate, like industrial, are thriving. Meanwhile, specialized subsectors such as telecom tower REITs and data centers look poised for many years of continued long-term growth. VNQ gives investors a simple and effective way to invest in all of these diverse types of real estate at once, from data centers and telecom towers to timberland, casinos, and golf courses, and does so for a minimal fee.

Owning real estate through an ETF like this is a sensible way for investors to hedge against inflation, as rising inflation also drives up the prices of hard assets like real estate. VNQ’s above-average 4.3% dividend yield is another nice feature for holders.


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