REITs Rally To Beat S&P's Best Day On New Inflation Data
Real estate stocks outperformed the entire S&P 500 Tuesday, leaping 5.3% as investors poured in money on news that inflation slowed in October.
REITs’ stock growth took place on the strongest day recorded by the S&P all year and is a signal of investors’ confidence that the inflation news serves as a harbinger of a break for the property sector after months of interest rates aimed at curbing inflation.
Inflation increased 3.2% last month, slower than the 3.7% seen in September, according to the Census Bureau’s consumer price index.
“The interest rate rises should be over, and the Fed will have to consider cutting interest rates seriously,” National Association of Realtors Chief Economist Lawrence Yun said in a statement Tuesday. “In the meantime, the bond market is reacting as if the Fed will be cutting interest rates next year. Mortgage rates look to head towards 7% in a few months and into the 6% range by the spring of 2024.”
In addition, the 10-year Treasury yield dropped more than 18 basis points to about 4.45%, and 30-year mortgages edged down 0.125 percentage points.
“Treasuries going down is great from a real estate standpoint because it gives borrowers ... more lending power,” said Brandon Moulton, managing director of Renovo Financial, a lender in the CRE space.
A similar stock surge for property companies took place in July on news that inflation in June had increased 3%. But the Federal Reserve just weeks later announced another rate hike.
The FTSE Nareit All Equity REITs Index, another measure of real estate stocks, spiked about 5.4% on Tuesday.
Continued positive economic data would likely mean some rate cuts in the second part of 2024, RSM US Real Estate senior analyst Crystal Sunbury said.
“We're projecting 100-to-125-basis-point cuts in total in 2024, which would bring the policy rates in the 4% to 4.25% rate,” Sunbury said.
That is good, but not a panacea for all that ails the commercial real estate market, she said.
“We're not going back to the rates that we saw during the pandemic period,” Sunbury said. “We'll see a bit of recovery, but it's still going to be limited given that investors and lenders will continue to manage risk.”
YTD laggards outperformed today with REITs jumping most (a 5.3% gain); Tech and Comm Serv continue to lead and do well YTD … small caps outperformed large caps today with Russell 2000 Value outperforming (and now adding to serious MTD gain) pic.twitter.com/AgoqSTVwg3
— Liz Ann Sonders (@LizAnnSonders) November 14, 2023
Although lower inflation points toward interest rate stabilization, it isn't the only metric the Fed considers in making rate decisions, so lower interest rates next year are far from a done deal, said Abby Rosenbaum, lead economist for Oxford Economics’ retail product.
“We feel the disinflation process still has some ways to go, and it will be a while before the Fed is confident enough to think about lowering interest rates,” Rosenbaum told Bisnow by email.
“This higher for longer environment will keep commercial real estate NOI yields elevated in the near-term,” Rosenbaum said. “Given the higher cost of capital, we expect lower transaction volumes in the year ahead. Once interest rates begin to slowly recede, toward the end of 2024, we expect capital values and NOI yields to gradually recover.”
Some of the damage caused by the quick rise in interest rates will take time to undo.
“When interest rates rose, some folks were caught in the crosshairs, and we don't really know what the damage is on a community bank or regional bank level just yet,” Moulton said. “As far as with office and other workouts, it's still a wait-and-see moment.”
Lower interest rates aren't going to be enough to overcome the particular challenges facing the office market, Sunbury said, as demand isn't close to meeting supply for that property type due to the normalization of hybrid work schedules.
In CRE finance, lower rates will help with the maturity wall, Sunbury said, but “there's still a risk there.”
