Historically, REITs have outperformed both private real estate and broad equity markets when central banks pause rate hikes (Figure 1). While REITs have outperformed private real estate since the Fed paused rate hikes in July 2023, they have come up short against broad equities (Figure 2). We think sticky inflation which has heightened the uncertainty around future central bank action, is part of the reason for this.
Is the historical trend starting to unfold? We think it could be.
July could be the first real glimpse into a return to normal for REIT relative performance. In July, waning inflation and compressing real rates favored listed global real estate. In the broader market, we saw a notable shift in leadership from growth stocks to value-oriented and capital-intensive sectors and listed global real estate (Figure 2). This is a sharp contrast to the prior 12 months, when REITs significantly underperformed the broader market.
Figure 1
Source: Federal Reserve Board; Nareit; NCREIF; FactSet. Data as of 2023:Q4. Past performance is not indicative of future results. Note: There have been 5 monetary tightening cycles since 1990. Analysis includes the first 4 cycles. The latest cycle was excluded due to the lack of data on 4 quarter results.
Admittedly, we saw a similar performance run in the fourth quarter of 2023, when REITs outperformed on expectations of rate cuts in 2024. The market clearly got ahead of itself, but we believe this run is different. 2024 has provided evidence that a Fed rate cut is on the horizon. First, other central banks are cutting, which puts pressure on the Fed. But most importantly, July’s CPI report of a 12-month inflation rate of 2.9%, the lowest level since March 2021, puts inflation closer than ever to the Fed’s long-run inflation target.
Figure 2
Source: D&P, Bloomberg Finance L.P. U.S. REITs represented by the FTSE NAREIT Equity REITs Index, U.S. Equities represented by the S&P 500 Index, Global REITs represented by the FTSE EPRA NAREIT Developed Index (net), Global Equities represented by MSCI ACWI Total Return (USD) Index, Global Growth - Equities represented by MSCI World Growth Net Total Return (USD) Index, Global Value - Equities represented by MSCI World Growth Net Total Return (USD) Index, Global Technology - Equities represented by MSCI ACWI Information Technology Index. Past performance not indicative of future results.
What does this mean for REITs?
Historically, as shown in Figure 1, REITs have returned 20.9% in the 12 months after a Fed tightening cycle, outperforming both private real estate and equities. With rate cuts on the horizon, this bodes well for REIT performance. While we still expect a few bumps in the road, we expect REITs to outperform. The follow-up question could be, is there more ground to make up this time around?
This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities. Forward-looking statements are necessarily speculative in nature. It can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. An increase in interest rates can cause markets to decline and certain companies and sectors may be adversely impacted. Different periods in time and longer periods may produce results that vary. Indices are not available for direct investment and do not reflect the deduction of any fees. Duff & Phelps Investment Management Co. services are not available in all jurisdictions and this material does not constitute a solicitation or offer to any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Past performance is not indicative of future results.