REITs are undoubtedly one of the most popular instruments for dividend investors. However, especially in these times, they can also bring great dangers and several specific risks to watch out for. In particular, REITs focusing on commercial and office space are at risk.

REITs (Real Estate Investment Trusts) are companies that invest in real estate and provide investors with the opportunity to invest in the real estate market without the need for separate ownership of the property. REITs offer investors a number of benefits such as stable returns, portfolio diversification and easy liquidity. However, investing in REITs also carries risks. And especially in these times of talk of a commercial real estate crisis.

REITs must pay out a large portion of their profits in the form of dividends because those are the rules for their tax status. Specifically, in order to maintain their REIT status and thus receive tax benefits, they must meet several conditions.

• Pay out at least 90% of their taxable earnings as dividends to shareholders.
• At least 75% of their income must come from real estate assets, such as rental income.
• They must be actively trading in real estate.

The latter rule ensures that REITs focus primarily on the real estate business. And the first - the mandatory high level of dividends paid - means that most of their profits flow back to shareholders. But not everything is rosy, and there are risks.

Let's look at the general ones first.

1) Interest rates: REITs have high funding costs and are therefore sensitive to changes in interest rates. If interest rates rise, it can mean an increase in the REIT's funding costs, which can have a negative impact on the company's profitability and dividend payout.

2) Risk of expensive management: REITs have high property management costs and can be vulnerable to regulatory changes that affect property management. If property management is poor or regulation is too strict, it can negatively impact the value of a REIT investment.

3) Liquidity Risk: Investments in REITs may be less liquid than other investments in the market, which means that investors may find it difficult to sell their investments when they need the money.

REITs may also be affected by the selection of properties in which they invest. If a company invests in the wrong properties, it can negatively impact the value of a REIT investment. Overall, REITs are a suitable investment option for investors seeking diversification of their portfolio and stable returns, but they do carry certain risks and investors should carefully evaluate their goals and investment strategies before investing in a REIT.

This is especially true now that several new factors have emerged.

Current risks

4) Home office: there is some risk to REITs due to the home office boom and the current decline in demand for commercial and office properties. Many companies now require partial or full work from home, which means they need less office space. This can negatively impact occupancy and rents for REITs that own and operate office buildings.

Many employees still work from home at least partially since the COVID-19 pandemic, so companies need less office space. The global economyis experiencing a slowdown in growth due to inflation, the Russian invasion and other factors, leading companies to be reticent to expand their office needs. Companies are facing rising costs for energy, payroll and other inputs, so they are trying to cut costs by limiting investment in new office space. Some firms are starting to move to other types of properties such as warehouses or shops instead of offices.

All of this is leading to lower demand growth or a drop in demand for office buildings, forcing owners and REITs to deal with lower occupancy and rent pressures.

5) Late payments: businesses may struggle to pay rent on time due to the poor economy, especially in an economic downturn. This can cause a temporary or permanent drop in income for REITs. For example, the popular $MPW has seen this for itself.

If demand for office space remains at lower levels, it could push down the value of office properties held by REITs. This could negatively impact the capital and ability of these companies to continue to grow.

So there is some risk to office real estate-focused REITs in the short to medium term due to the growing popularity of working from home and the overall economic downturn. However, in the long term, demand for commercial real estate could pick up again if the economy starts to grow.

What do you think? Will demand for office and commercial buildings continue to decline or will the situation calm down and turn around?

Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.