Fed Rate Cut: A Boost for REITs?

The recent interest rate cut by the Federal Reserve could prove beneficial for real estate investment trusts (REITs). Since September 18, regulators have implemented a reduction of half a percentage point, which could have a positive impact on the REIT sector. The National Association of Real Estate Investment Trusts (Nareit) emphasizes that interest rate adjustments typically have a supportive effect on the industry. Matthew Sgrizzi from LaSalle Global Solutions highlights the positive reality of this change in the real estate sector. Nonetheless, REITs face the challenge of maintaining their standing against the broader stock market in the long term. Jason Yablon from Cohen & Steers sees the recovery of publicly traded REITs as more rapid compared to the private real estate market. The high interest rate period significantly impacted REITs, as rising rates and adjusted property values prompted investors to withdraw. Consequently, REITs experienced a stronger reevaluation of their earnings ratios than other equity sectors during the recent interest rate hikes. Greg Kuhl, portfolio manager at Janus Henderson Investors, predicts a comeback for REITs, which could outperform other sectors in the future if interest rates continue to fall. The historical development of REITs also supports this outlook. A decline in the yields of ten-year US Treasury bonds can typically improve the overall performance of REITs, a trend noticeable since 2022. Positive prospects for mortgage REITs Mortgage REITs have lagged behind the broader stock market over the past two years, especially under high interest rate conditions. According to Nareit, the outlook for this sector is particularly positive. Steve DeLaney from Citizens JMP points out that the commercial mortgage REIT sector can benefit the most from decreased valuation and eased portfolio-related stress factors. Improved sector valuation potential, reduced pressure on book value, and relief from interest caps on variable-rate loans could herald a turnaround if rates continue to fall.