REITs underperformed on back of rising interest rates, WFH & vacancies in property after COVID (2024)

FAQs

Why are REITs performing poorly? ›

Interest rate risk. The biggest risk to REITs is when interest rates rise, which reduces demand for REITs. 6 In a rising-rate environment, investors typically opt for safer income plays, such as U.S. Treasuries. Treasuries are government-guaranteed, and most pay a fixed rate of interest.

REIT Stock Performance and the Interest Rate Environment

Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns.

Due to the strong negative correlation, rising interest rates in 2022 directly led to the negative performance of the real estate sector that year. While interest rates have mostly flattened out since October 2022, the higher rates have kept REIT stock prices down.

More than a year of interest rate hikes by the Federal Reserve pushed down returns on real estate investment trusts, or REITs. While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard.

Higher rates hurt REITs because, like utilities, they are capital intensive and often carry a lot of debt. “Coming into this year, investors expected the Fed to pivot,” says Gina Szymanski, a managing director of AEW Capital Management and a real estate securities portfolio manager.

REITs historically perform well during and after recessions | Pensions & Investments.

But despite that, most REITs have kept growing their dividend. Most of them hiked in 2022, 2023, and will hike again in 2024. This is the ultimate proof that REITs are doing better than what the market appears to believe.

Shares of the REIT fell on a higher-than-expected inflation report. Realty Income (O 0.64%) tends to be a low-volatility stock. After all, the company is a Real Estate Investment Trust (REIT) that specializes in triple-net leases to recession-proof tenants in mostly stand-alone locations.

Real estate investment trusts, or REITs, allow investors to add a diversified collection of real estate to their portfolio through a single entity. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.

Right now, REITs (VNQ) are at an inflection point and time is running out for investors. But now as we head into 2024, we expect the polar opposite and this should lead to an epic recovery across the REIT sector. The Fed expects at least 3 interest rate cuts in 2024 and the market is predicting even more.

Will REITs bounce back? ›

In fact, REIT total returns bounced back with impressive performance in the last quarter of 2023. Based on historical experience, the convergence of the wide valuation gap between public and private real estate will likely ensure continued REIT outperformance into 2024.

After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.

Interest Rates. During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.

Since most non-traded REITs are illiquid, there are often restrictions to redeeming and selling shares. While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value.

Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.

In addition, higher interest rates make the relatively high dividend yields generated by REITs less attractive when compared with lower-risk, fixed income securities, which reduces their appeal to income-seeking investors.