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Real Estate Stocks Take A Hit Amid Stock Market Volatility

Stock market volatility continued Monday with the sharpest single-day point drop in the Dow Jones’ 121 years of existence — and real estate stocks were among those to fall. 

What happened? 

Wall Street, stock market

The Dow fell 1,175 points, or 4.6%, by the closing bell. This dive followed Friday’s 666-point drop

The plunge also resonated through real estate investment trust stocks, resulting in a 2.9% drop in the FTSE NAREIT All Equity REIT Index Monday. 

Why the free fall? 

Analysts attributed the dive to a series of factors, including concerns regarding rising interest rates and the pace of the Federal Reserve’s short-term rate hikes. 

Investors wary of the inflated state of the stock market, which has been on the rise since November 2016, also contributed to the sell-off. The Dow's pace of change has increased dramatically in the last few years. It took the Dow 14 years to increase from 10,000 to 15,000 points (a milestone it hit in 2013), but only 12 months to advance from 20,000 to 25,000 following President Donald Trump’s win last year, CNN reports. In January, the Dow skyrocketed 1,000 points to 26,000 in just seven days.

Stocks have outpaced corporate earnings for some time now, and stock market analysts say the market is in need of a 5% to 10% correction, CNN reports

“Whenever the economic expansion gets long and resources start getting tight we need to keep an eye out for excesses that could tip the economy into recession,” Cushman & Wakefield Principal Economist Ken McCarthy told Bisnow in December. “This will be important to keep an eye on in 2018. A major correction in the stock market could have negative economic implications."

Why the real estate industry should care

Commercial real estate, towers, office building

NAREIT Economist Brad Case said the 2.86% drop in the All Equity REIT index, though sizable, will be short-lived. 

“It’s not that REITs are [completely] insulated from it, but to a great extent they are,” Case said. “The earnings drivers for REIT returns come from the real estate market cycle, and the real estate market cycle is very different from the business cycle that drives the rest of the stock market. Not only are real estate operating fundamentals strong, they likely will be for some time.”

Case believes REITs, which underperformed the broad stock market in 2017, may see an influx in investment activity this year as investors sell off volatile, overvalued growth stocks in search of safety. 

The divide between REIT stock prices and the value of their assets could prove beneficial in this environment, Case said, giving investors an opportunity to pick up REIT stocks at a discounted price. 

“Some of those people are saying they want to cut back on risk. Others … will invest in assets that are undervalued, which is where REITs [come in],” Case said.

The biggest losers? 

Apartments, multifamily

Equity REITs that experienced the largest drop in stock price Monday were: 

— One Liberty Properties Inc., which focuses on single-tenant net-leased acquisitions and is based in Great Neck, New York. The stock fell 8.8% to $21.77. 

— Ashford Hospitality Trust, a hospitality REIT with a $568.9M market cap that invests in upscale, full-service hotels. Shares fell 6.9% to $5.84. 

— Atlanta-based Preferred Apartment Communities Inc., which specializes in multifamily, office, student housing and retail assets. Stocks fell 6.7% to $14.71.