New York, NY - Jan 19, 2024 - While U.S. real estate stocks continued to lag behind the broader market in 2023, a ray of hope shines in 2024. Falling inflation and the expectation of an economic soft landing are fueling optimism in the sector, especially if the Federal Reserve cuts interest rates as aggressively as many predict.
REITs Bouncing Back?
Real estate investment trusts (REITs) were hit hard in 2023, weighed down by high borrowing costs and the shift to remote work impacting office demand. The Real Estate sector fell 3.4% compared to the S&P 500's 24% soar. However, January started off weak for real estate, down another 3.4%, but sentiment seems to be shifting.
Investors are betting on a reversal, driven by lower rates. With cheaper borrowing, REITs can boost revenue and grow. "REITs were crushed by rising rates, but they'll bounce back with rate cuts," says Justin McAuliffe, bullish on REITs like American Tower.
Money Flowing Back In
There are signs of returning interest. Global fund managers increased their REIT exposure by 15% in December, reaching a 12-month high. And the largest US REIT ETF saw $35 million in inflows last week, its highest since October.
History Favors REITs in Rate Cuts
Historically, the end of a Fed rate hike cycle has been good for REITs. Since 1995, they averaged a 20.1% gain in the year following the last rate hike of a cycle. The S&P 500 also gained, but at a lower 10% average.
"If central banks truly ease up, REITs are set to win," says CenterSquare Investment Management.
Obstacles and Opportunities
However, it's not all sunshine and roses. Oversupply of office space due to hybrid work trends remains a concern. McKinsey estimates this could wipe $800 billion off the value of office buildings by 2030.
Chris Miller of Allspring Global Investments is cautiously optimistic. "There will be concerns, but stabilizing interest rates give us hope for 2024," he says.
Eyes on Data and Earnings
Investors will be watching inflation and economic data next week, along with earnings from major companies like 3M, United Airlines, and Abbott Laboratories. Most REITs report later in the quarter, with Simon Property Group and American Tower on the horizon. Prologis recently missed analyst estimates, reflecting weakness in freight demand.
Climbing the Wall of Worry
While challenges remain, falling inflation and a potential shift towards easier monetary policy are injecting optimism into U.S. real estate stocks. Investors will need to navigate "a wall of worry" this year, but ultimately, a turnaround could be in sight.
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