Real estate stocks have faced a challenging start to 2024, underperforming the broader stock market amid concerns that the Federal Reserve may not quickly lower borrowing costs as anticipated by investors. The Real Estate Select Sector SPDR Fund (XLRE), which includes top holdings like Prologis (PLD) and American Tower (AMT), has seen a 3% decline year to date, while the SPDR S&P 500 ETF Trust (SPY) has gained over 1%.
This downturn follows a tough year for commercial real estate, marked by plummeting property values and record-high office vacancy rates. Additionally, the prevailing belief that interest rates will remain elevated for an extended period is putting pressure on equities. Market probabilities for a quarter-point cut by the Fed in March have dropped from nearly 77% a week ago to 41% as of Monday.
Despite these challenges, analysts at Wedbush maintain an optimistic outlook for Real Estate Investment Trusts (REITs) once the Federal Reserve’s path becomes clearer. According to Wedbush analysts Richard Anderson and Jay Kornreich, REITs are influenced by macro trends and factors such as strong retail sales in December, which could limit the Fed’s ability to cut rates.
The analysts expressed confidence in the economy’s resilience, citing robust wage growth and a highly-employed U.S. population as positive factors supporting stable or growing demand for real estate in various forms. They anticipate that once clear evidence of a stable Treasury yield range emerges, REIT shares will experience a significant uptrend.
Wedbush’s optimism is shared by others in the industry. Nick Thillman, senior equity research analyst at Baird, believes that the second half of the year presents a more favourable setup for REITs. Improved visibility on the rate environment and digestion of supply are expected to contribute to this positive outlook. Thillman notes that a lack of new supply has entered the market due to tight borrowing conditions over the past 18 months. As borrowing conditions ease and supply dynamics change, the growth outlook for real estate stocks is anticipated to improve in the second half of 2024 and into 2025.
