REIT Performance Following The End of Fed Hikes

REITs rallied hard following this month’s CPI print. That is not especially surprising, as REITs have performed well following the end of the previous three hiking cycles. In fact, research from the Pension Real Estate Association (PREA) finds[1]:

·  Over the past 25 years, there have been four main episodes of Fed rate hike cycles, each with different economic backdrops.

·  REITs have historically enjoyed strong total returns in the quarter immediately following the end of tightening cycles, outperforming private real estate. This outperformance has strengthened over time.

·  In Q4 2023, after the most recent rate hike cycle ended, 12 out of 13 REIT sectors posted double-digit total returns. The office sector performed notably well despite some concerns.

·  The wide valuation gap between public REITs and private real estate is expected to drive continued REIT outperformance into 2024 as valuations converge.

·  In the remainder of 2024, REITs are poised to benefit from the end of the tightening cycle, attractive valuations vs private real estate, and strong balance sheets allowing for opportunistic acquisitions.

Perhaps most notably, PREA highlights the performance difference between public equity REITs and private real estate after monetary policy tightening cycles end. On average, across the one-, two-, and four-quarter time horizons following the end of the first three rate hike cycles since 1999, REITs outperformed private real estate. The performance gap has widened in more recent periods, with the FTSE Nareit All Equity Index outperforming the NCREIF Fund Index—Open End Diversified Core Equity (NFI-ODCE) by 22.7% in the quarter immediately following the most recent tightening cycle that ended in Q3 2023. The authors attribute this outperformance to the significant valuation gap between public and private real estate, with REIT-implied cap rates exceeding private appraisal cap rates by 216 basis points as of Q3 2023. As this valuation divergence converges, likely through rising REIT valuations, the paper expects REITs to continue outperforming private real estate into 2024.

[1]  Hike, Stop, and Bounce: REIT Performance After Monetary Policy Tightening Ends