The chatter is rising, and it has gone from whispers to shouting; commercial real estate (and the banking system as a whole) may be in big trouble. When Elon Musk and Berkshire Hathaway Vice Chair Charlie Munger come out with warnings, many across Wall Street pay attention. Musk feels that the biggest tail risk now is a commercial real estate debacle that may not be all that far down the road.
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Musk said this about the potential for a meltdown:

Commercial real estate used to be something that was a Grade A asset, that if a bank had commercial real estate holdings those would be considered the highest security, some of the safest assets you could have. Now, that is not the case anymore. One company after another is canceling their leases or not renewing their leases. Or, if they go bankrupt, there’s nothing for the bank who owns that real estate to go after, because they were a previously strong company now dead. What do you do at that point?

The tough part for investors, especially those who are income oriented, is that many own real estate investment trusts (REITs) for their reliable quarterly (in some cases monthly) dividends. Most have fared poorly in the rising interest rate environment of the past year, and many are potentially shaky going forward.

One subsector that still has big-time growth potential and also offers solid dividends is the data center REITs. Jefferies still sees big growth in that arena and noted this in a new research report:

The data center market is shifting heavily in favor of landlords, with market vacancies around 3-4% in the US and 4-5% in Europe, and an increasingly constrained ability to deliver new power to support data center demand. Market rents have been rising over the past year, and we expect this trend to continue. We estimate that a return to modest leasing spreads, occupancy upside, and stronger development yields will push adjusted funds from operation per share growth to +5% to +15% in the coming years.

Another strong subsector that makes sense is the cellphone tower REITs. Regardless of the economy, consumers will continue to use their smartphones at an increasingly growing rate, as landline use continues to decline.

The following four top companies look like very solid ideas in these two areas, and all four can likely dodge the issues other REITs will be facing, especially if the economy goes into recession later in the year. While all are rated Buy at top Wall Street firms, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

This wireless tower company is a top pick on Wall Street and an acknowledged industry leader. American Tower Corp. (NYSE: AMT) is one of the largest global owners and operators of wireless and broadcast communications towers.
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Its portfolio includes approximately 219,000 sites in the United States, Latin America, India, Europe, and Africa. The core business for the company is leasing space on its wireless towers, primarily to wireless carriers, government agencies and broadband data providers.

On a multiple basis, its shares trade cheaper than the competition, and many top analysts around Wall Street feel the growth potential for the company remains among the best in the industry.

Investors receive a 3.13% dividend. Deutsche Bank has a $245 target price on American Tower stock. The consensus target is $242.20, and shares closed on Tuesday at $196.13.

Digital Realty Trust

This company is the gold standard in its sector and offers investors big upside potential. Digital Realty Trust Inc. (NYSE: DLR) is the largest wholesale data center REIT, with a strong position in most major markets, especially Northern Virginia.

Digital Realty brings companies and data together by delivering the full spectrum of data center, colocation and interconnection solutions. PlatformDIGITAL, the company’s global data center platform, provides customers with a secure data “meeting place” and a proven Pervasive Data Center Architecture solution methodology for powering innovation and efficiently managing data gravity challenges.

Digital Realty gives its customers access to the connected communities that matter to them with a global data center footprint of more than 300 facilities in over 50 metros across 28 countries on six continents.

Digital Realty Trust stock investors receive a 4.92% dividend. The Jefferies price target is $127, while the consensus target is $116.39. The shares closed at $94.75 on Tuesday.

Equinix

This data center giant has a huge customer base, and the stock has backed up in price, providing a nice entry point. Equinix Inc. (NASDAQ: EQIX) is the world’s digital infrastructure company, enabling digital leaders to harness a trusted platform to bring together and interconnect the foundational infrastructure that powers their success.
Equinix enables today’s businesses to access all the right places, partners and possibilities they need to accelerate advantage. With Equinix, they can scale with agility, speed the launch of digital services, deliver world-class experiences and multiply their value.
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Top analysts feel the growth in artificial intelligence (AI) could be huge for companies like Equinix, as they can provide valuable solutions needed for the development and growth of new technologies.

Shareholders receive a 1.88% dividend. Citigroup’s $825 target price is well above the $784.81 consensus target. Equinix stock closed on Tuesday at $703.17.

SBA Communications

This company continues to find solid growth opportunities, and shares are trading close to a 52-week low. SBA Communications Corp. (NASDAQ: SBAC) is a first-choice provider and leading owner and operator of wireless communications infrastructure in the Americas, South Africa and the Philippines.

It generates revenue from two primary businesses: site leasing and site development services. The primary focus of the company is the leasing of antenna space on its multitenant communication sites to a variety of wireless service providers under long-term lease contracts.

The company’s wireless communications infrastructure includes towers, buildings, rooftops, distributed antenna systems and small cells. Its portfolio includes more than 35,000 communications sites in 16 markets.

The dividend yield here is 1.30%. Credit Suisse has set its target price at $330. SBA Communications stock has a consensus target of $319.80, and shares ended Tuesday trading at $246.99.

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Note that in the past three years two of the big data center REITs, CyrusOne and QTS Realty, were purchased at big premiums. So, a takeover of any of these outstanding companies is a possibility, as demand is likely to increase sequentially. All are good fits for growth and income investors looking for income, a degree of safety and solid upside potential.

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