For the rest of us, that means REITs. This is, in fact, becoming increasingly common advice. To give one example, in February of this year, the Parsippany, NJ-based investment services provider Hennion & Walsh, a provider of investment services told investors, “As market volatility is expected to continue….consider looking beyond 'core' holdings in global equities and fixed income and considering adding 'satellite' allocations to areas such as REITs, energy and the US dollar.”

And indeed, year-to-date through the end of April REITs outpaced the broader equity market. The total returns of the FTSE/NAREIT All REIT Index were 4.1% while the S&P 500 Index gained 1.7%. March was a particularly good month for REITs, with the FTSE/NAREIT All REIT Index rising 10% and outperforming the S&P 500 Index's 6.8% increase that month.

There was a period of time not that long ago during which REITs' outperformance of the broader market would have been almost a given. For years the sector has clocked in with higher rates of growth. That ended some 18 or so months ago for a number of reasons, including overall market volatility and the first signs from the Federal Reserve Bank that it would start to tighten monetary policy.

But even as REIT returns diminish they still, in the aggregate, outperform the S&P 500. In 2015, total returns of the FTSE/NAREIT All Equity REIT Index rose 2.8%; the S&P 500 Index added 1.4% during the same period.

Of course, there are always the outliers. Some REITs have been delivering outsized returns for years. FactSet, a financial data company based in Norwalk, CT, compiled a list of the 10 REITs that have delivered the highest total returns over the past five years. They, along with a chart racking their performance, appear below this story.

Reading through this list, some trends are immediately apparent, and familiar to veteran REIT watchers. There is a mortgage REIT, an impressive feat in and of itself given the tricky business that interest rate management has become. And of course, no list of top-performing REITs would be complete without a company that specializes in multifamily.

Tellingly, most of the “newer” asset classes in the REIT world are represented on the list, such as data centers, manufactured housing and self-storage. In fact, technology is the driving force behind a number of emerging REIT asset classes, such as digital billboards and wireless REITs. Equinix's strategy is to support these trends pushing forward the digital economy “by providing the underlying infrastructure that powers the Internet,” according to Jason Reed, SVP of global real estate for Equinix. “We are pleased with our current business momentum, having delivered 53 quarters of consecutive growth and continued shareholder value, and the REIT structure positions us well.”

But even these alternative asset classes—as in, sectors outside the four main food groups of commercial real estate—rely on the same strategies for growth. For instance, Extra Space Storage's primary goal is to enhance shareholder value through consistent growth in funds from operations, says CEO Spencer F. Kirk.

“We have accomplished this through best-in-class same-store performance, accretive acquisitions, long-term joint venture partnerships, a growing third-party management business and an efficient balance sheet,” he says. “Each of these drivers has contributed to delivering 22 consecutive quarters of double-digit FFO growth.”

Total returns, strong FFO, dividends. There are any number of metrics for an individual or an advisor to use when selecting which REIT or which basket of REITs in which to invest.

This is an easy and straight forward approach: pick your metric, run the numbers and badda bing, badda boom—you have a list of viable candidates.

But if this were all there was to picking top REITs, we'd be living in Lake Wobegon, or rather our portfolios would be. Lake Wobegon is, of course, the fictional town where “all the women are strong, all the men are good looking and all the children are above average.”

In truth there are many factors that differentiate REITs. Metrics such as total returns and dividends are just the start.

Earlier this year, Equity Residential closed on its sale of 23,262 apartment units to Starwood Capital Group for $5.4 billion. The transaction represented about a quarter of Equity Residential's portfolio and it has been widely assumed that CEO Sam Zell was disposing of the portfolio because he felt the apartment market has peaked. Starwood Capital CEO Barry Sternlicht is no dummy—and, in fact, he and Zell are reported to be good friends. Sternlicht sees the same market indicators as Zell; he, however, has a different strategy and perspective for and of the market.

The growth of specialty asset classes such as manufactured housing or single-family homes owned by institutional investors is a manifestation of this trend by REITs to focus on what they do best. Assets that don't fit this criteria, or that aren't seen as the best in class, are either sold off or spun off. Vornado Realty Trust put this strategy on the map when it spun off its strip center and mall holdings into Urban Edge Properties last year. Now it reportedly is thinking of doing the same with its Washington, DC holdings, which are dragging down the REIT's overall earnings.

Capital access is becoming a problem for REITs and how companies are able to navigate this issue could make or break their long-term prospects. Fitch Ratings recently reported that weaker REIT capital access to the public unsecured bond market and CMBS market “was casting a shadow over otherwise healthy property operating fundamentals.”

But some REITs still have the financial creds, not to mention securable assets, to find capital. Two recent examples: Chicago-based General Growth Properties secured a $1.4-billion term loan refinancing backed by 15 retail properties across the US. Minneapolis-based US Bank led the refi, joined by 14 other lenders, including Wells Fargo Securities. Around the same time, Bethesda, MD-based RLJ Lodging Trust announced it had refinanced more than $1 billion in debt.

In some cases REITs are accessing capital by displaying prudence in their buying and selling strategies. Washington REIT recently closed a public offering of 4.62 million common shares priced at $28.20 apiece, for a total of $130.4 million in gross proceeds. This transaction followed the news that the Washington DC-based entity sold six of its suburban Maryland office properties for $240 million and is acquiring Riverside Apartments in Alexandria, VA, for $244 million.

Fitch mentioned this strategy (in general, not specifically about Washington REIT) in the same alert in which it noted REITs' weaker access to the capital markets. As REITs navigate the more challenging capital markets landscape, it said, “…Many companies have substituted asset sales for equity issuance to fund external investments on a leverage-natural basis…”

The market will be shifting for REITs in September when the S&P Dow Jones Indices and MSCI Inc. stock indexes give real estate securities their own category within the Global Industry Classification Standard instead of lumping them together under the general financial sector umbrella.

In the aggregate, the change will have a huge impact. Market analysts such as Cohen & Steers have estimated that an additional $100 billion or more in capital will move into the REIT sector as equity fund managers rebalance their portfolios to account for the new category.

In the short run, or—perhaps better put—in real time, it will be difficult to see any impact at all, according to Brad Case, NAREIT's senior vice president of research and industry information. “The effect of the new category will be felt gradually over a long period of time, giving the market plenty of time to get used to it.” Funds need to be established in some cases, he says; for other funds the problem is not having the specialized expertise in house.

“There are fund managers out there with mandates that include REITs but they have never really understood real estate so they have avoided investing in real estate securities,” he says. “They have been able to disguise this because the indices don't break out real estate as a sector.”

In the long run, the change will reduce volatility and decrease the correlation between the larger equity market and real estate, says Case. And no doubt, it will generate an entirely new list of top-performing REITs.

This is an HTML version of an article that ran in Real Estate Forum. To see the story in its original format, click here.

Semi-retired real estate economist Mark Dotzour is a retirement advisor's worst nightmare. He invests in what he knows, thus leading him to violate a cardinal rule of portfolio management for individuals: never be too exposed to the same industry in which you make your living. Dotzour has 86% of his portfolio invested in commercial real estate. There is simply no other asset class that can deliver decent yield in the current environment, he says.

Dotzour, who was the chief economist of the Real Estate Center at Texas A&M University for 18 years and now advises banks, private equity firms, REITs, wealth managers and commercial and residential brokerage firms from his College Station, TX office, isn't urging individuals to follow his example, or at least his portfolio allocation. But he does say that real estate should be represented in every portfolio. For experts such as Dotzour and institutional investors, that could mean any number of financial instruments or even direct investments.

For the rest of us, that means REITs. This is, in fact, becoming increasingly common advice. To give one example, in February of this year, the Parsippany, NJ-based investment services provider Hennion & Walsh, a provider of investment services told investors, “As market volatility is expected to continue….consider looking beyond 'core' holdings in global equities and fixed income and considering adding 'satellite' allocations to areas such as REITs, energy and the US dollar.”

And indeed, year-to-date through the end of April REITs outpaced the broader equity market. The total returns of the FTSE/NAREIT All REIT Index were 4.1% while the S&P 500 Index gained 1.7%. March was a particularly good month for REITs, with the FTSE/NAREIT All REIT Index rising 10% and outperforming the S&P 500 Index's 6.8% increase that month.

There was a period of time not that long ago during which REITs' outperformance of the broader market would have been almost a given. For years the sector has clocked in with higher rates of growth. That ended some 18 or so months ago for a number of reasons, including overall market volatility and the first signs from the Federal Reserve Bank that it would start to tighten monetary policy.

But even as REIT returns diminish they still, in the aggregate, outperform the S&P 500. In 2015, total returns of the FTSE/NAREIT All Equity REIT Index rose 2.8%; the S&P 500 Index added 1.4% during the same period.

Of course, there are always the outliers. Some REITs have been delivering outsized returns for years. FactSet, a financial data company based in Norwalk, CT, compiled a list of the 10 REITs that have delivered the highest total returns over the past five years. They, along with a chart racking their performance, appear below this story.

Reading through this list, some trends are immediately apparent, and familiar to veteran REIT watchers. There is a mortgage REIT, an impressive feat in and of itself given the tricky business that interest rate management has become. And of course, no list of top-performing REITs would be complete without a company that specializes in multifamily.

Tellingly, most of the “newer” asset classes in the REIT world are represented on the list, such as data centers, manufactured housing and self-storage. In fact, technology is the driving force behind a number of emerging REIT asset classes, such as digital billboards and wireless REITs. Equinix's strategy is to support these trends pushing forward the digital economy “by providing the underlying infrastructure that powers the Internet,” according to Jason Reed, SVP of global real estate for Equinix. “We are pleased with our current business momentum, having delivered 53 quarters of consecutive growth and continued shareholder value, and the REIT structure positions us well.”

But even these alternative asset classes—as in, sectors outside the four main food groups of commercial real estate—rely on the same strategies for growth. For instance, Extra Space Storage's primary goal is to enhance shareholder value through consistent growth in funds from operations, says CEO Spencer F. Kirk.

“We have accomplished this through best-in-class same-store performance, accretive acquisitions, long-term joint venture partnerships, a growing third-party management business and an efficient balance sheet,” he says. “Each of these drivers has contributed to delivering 22 consecutive quarters of double-digit FFO growth.”