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REIT Stocks Respond To News Long Sought By Real Estate Industry

Wednesday morning brought the inflation news the real estate community, and the entire American economy, has looked forward to for more than a year: The consumer price index rose 3% year-over-year in June, the smallest gain since March 2021.

REIT stocks responded with a nearly 3% bounce compared to the beginning of the year as investors celebrated the strongest signal yet that capital markets-crippling interest rate increases could slow in the coming months. 


The FTSE Nareit All Equity REITs index was up 1.34% as of midday Wednesday and up 2.83% since the beginning of 2023.

Inflation is still above the Federal Reserve's target rate of 2%, meaning that the interest rate increases likely aren't over entirely, but Wednesday's news provided a measure of stability and a vote of confidence the CRE industry needed.

“So much of real estate is based on stability and understanding what's forthcoming," RSM U.S. Real Estate Senior Analyst Scott Helberg told Bisnow. "While we've been seeing interest rates jump, and then pause, and then jump, that makes investors hesitant, and keeps capital on the sidelines.”

The stock market as a whole has struggled lately, but REITs, and office REITs in particular, have dealt with a double whammy in the form of reduced office usage and rising interest rates. Some of the nation's largest office REITs have started pivoting away from their once-prized property type, diversifying into life sciences, data centers or other alternative asset classes.

This spring's bank failures piled on more trouble for REITs as investors fretted over exposure to real estate loans. Slowing inflation offers a glimmer of hope.

Office REITs actually began their comeback in June, ending the month at a 10.4% total return, the highest of any major asset class. Year-to-date, however, office REITs are still down 16% and are off 37% from last year.

Other REIT fundamentals have strengthened recently as well. U.S. REITs traded at a median 18.2% discount to their net asset value per share as of July 3, down from a 23.3% discount at the end of May, according to S&P Global Market Intelligence data.

Real estate isn't out of the woods yet, however. There is still a lot of ground to recover to regain its position from before interest rate hikes began. For instance, while the Nareit index made gains this week, it is still down nearly 7% compared with July 2022.

The Federal Open Market Committee meets again July 25 and 26 to determine where to go with interest rates. After a June pause, many expected the increases would continue in July, but Wednesday's news might have forestalled that, at least for now.

“There's still likely to be some increase in interest rates through the end of the year, but the slowdown in increases will be sooner rather than later,” Helberg said. “If we can get to a point where interest rates are stable or even decreasing, which I think will happen next year, then we'll start to see a real flow of activity in the real estate market.”

That includes interest in REIT stocks, Helberg said, adding that institutional funds still recognize publicly held real estate as an important part of their overall portfolios, though they have backed away from it lately.

“What we're seeing with our clients, with their advisers and the overall real estate environment, is that there's still plenty of interest in real estate,” Helberg said. “The long-term trend of real estate is seen as a profitable investment.”

Not all REIT sectors will benefit from a pause or reversal in interest rates, however.

“Office will certainly still be an area of struggle,” Helberg said. “Our perspective is that office may be going through what the retail sector had to go through in the late 2000s and early 2010s, when there was significant oversupply.”