REITs See Stocks Surge, Expected To Become More Aggressive Buyers

Publicly traded property owners are suddenly back in favor after two years of Wall Street betting against the commercial real estate sector. 

Real estate stocks posted their best day of the year on Thursday and led all S&P 500 sectors in gains last week, with the overall real estate sector rising 4.41% and Nareit's index of REITs rising 4.62%. That momentum has continued this week, with the REIT index rising 1.1% on Tuesday. 

The jump came after Thursday’s consumer price index report showed inflation continuing to cool and after Federal Reserve Chairman Jerome Powell testified to Congress that he was encouraged by recent data, sparking more hope about an interest rate cut in September. 

“It was a perfect storm,” Hoya Capital Chief Investment Officer David Auerbach told Bisnow. “People have been so down on REITs that they were looking for some type of good news. We got some of that good news. So I think the tide is starting to turn.” 

Office REITs posted the best week of any real estate segment with a 9.8% gain, according to Hoya Capital’s sector-level indexes.

Leading the charge was BXP, the office REIT previously known as Boston Properties, which posted a 12.37% weekly gain. BXP's share has continued to rise this week, gaining 1.4% on Tuesday.

Other major REITs to see big stock jumps include life sciences leader Alexandria Real Estate Equities rising 9.5% from last Wednesday to the end of the day Tuesday, industrial giant Prologis rising 6% over that period and data center owner Equinix rising 5.4%. 

“REITs don’t traditionally move several percent like this in a given week,” Auerbach said, describing the jump as “massive.”

Valuations of REITs — especially those that own office — took a beating in 2022 when rising interest rates, combined with a doomsday outlook on the CRE market, caused investors to shy away from the sector. Private real estate prices weren’t as quick to plunge, creating a gap in valuations between public and private real estate. 

“Now we're seeing that valuation gap between REITs and private real estate start to close as private real estate is, in a measured way, quarter on quarter, starting to price in the impacts of higher interest rates,” Nareit Executive Vice President of Research and Investor Outreach John Worth said. 

Since the start of 2023, REITs outperformed the private real estate market by nearly 33%, according to Nareit’s new midyear report. That performance has only accelerated over the last week as investor perceptions of real estate improve. 

“Today, what we're starting to see in the broader stock market is, as we see better news about inflation and a higher likelihood of rate cuts later this year, we're starting to see REIT stocks, like they did last week, outperform the broader stock market and recover generally," Worth said. 

During the downturn, REITs played their cards well, the report found, making them well-positioned for when the market picks back up. It found that REITs have reported solid operational performance — with high occupancy rates — and have maintained disciplined balance sheets, allowing them more flexibility and less stress than their private counterparts. 

This solid performance came even as the negative perception of commercial real estate on Wall Street led their stock prices to tumble. 

“Things can't get worse than where it’s been over the past couple of years, as far as sentiment is concerned for the sector, when a lot of these companies are humming along, they've grown their dividends, they've been beating the numbers they put up before Covid and everything,” Auerbach said. “But I think it's finally showing that maybe it's time to start looking at the sector again.”  

All of this puts REITs in a better place to increase their transaction activity after a period of caution, and experts foresee them pursuing more acquisitions and issuing more equity.

“They view this as an opportune time to go out and grow,” Worth said. They've got strong balance sheets, they've got the access to capital and they've got the strong fundamental performance.”

BXP has already shifted to offense. It revealed in January it bought out the interests of three of its partners on office properties, and in February it launched an “extensive” renovation of a D.C.-area office building. 

In February, W.P. Carey increased its investment volume expectations for the rest of the year. In June, the global net lease REIT announced it acquired three properties in Arizona, a new 300K SF distribution center for $40M and two fitness centers for $28M.

Federal Realty Investment Trust also announced this summer it had purchased a 665K SF retail center in Gainesville, Virginia, for $215M. 

Worth believes transactions will tick up “incrementally” through the rest of the year before accelerating in 2025. Asset classes that have the most certainty around pricing will be the first to transact, he said, like industrial, multifamily and data centers. 

Second-quarter earnings calls during the next few weeks will shed more light on how individual REITs are approaching their transaction strategies. 

But with REITs still trading at a discount to private real estate values, experts say the time to buy is now. By the time the Fed starts to cut rates, it’ll be too late.

“When the Fed makes the announcement at 2 p.m. ET that they're cutting interest rates, at 2 p.m. and one second the REITs are going to rally,” Auerbach said.

“And at 2 p.m. and two seconds, the adviser is going to call grandma and grandpa and say, ‘Hi clients, the Fed has cut interest rates, it's time to buy REITs because it's more attractive now.’ And that ship has already sailed. It will have already been priced in by the time the Fed makes that announcement.”