Financial advisors finally might want to build up their positions in publicly traded real estate in 2025.
That is, as long as interest rates cooperate.
REITs finished 2024 up 4.9 percent after falling 8.2 percent in the fourth quarter, according to Nareit. It was a lackluster ending to a relatively forgettable year for the asset class with REITs underperforming the S&P 500 (23 percent), the DJIA (13 percent), and the NASDAQ (29 percent).
Rising interest rates were a key factor in the drop-off in REITs at the end of 2024. The surge in the 10-year Treasury yield past 4.6 percent hurt the asset class as investors opted for the less risky income producing option.
A change appears to be underway in the new year, however, thanks to opportunistic post-Covid bargain shopping in commercial real estate and Washington's push for remote workers to return to their cubicles. Office building sales increased to $63.6 billion in 2024, up 20 percent from the previous year, according to MSCI.
Brian Storey, head of multi-asset strategies at Brinker Capital Investments expects US REITs to perform well in 2025. As long as yields remain rangebound, he said REITs can benefit from positive economic growth, constrained net new supply across most property types that rivals the caution in the decade following the Great Financial Crisis, and greater access to capital than private real estate to drive mid-single digit earnings growth.
Put it all together and Storey said he would not be surprised to see double-digit total returns from US REITs during 2025.
“Although we expect continued stress from the office sector, it is important to note that, unlike private real estate, in which office can represent roughly 20 percent of the real estate market, the office sector comprised less than 5 percent of the listed REIT market. Instead, health care, industrial, apartments, and tech infrastructure—sectors with greater growth potential—are the largest weights within listed REITs,” Storey said.
Similarly, Noreen Brown, Co-CIO at Summit Financial, said public REITS offer relative value and will rebound in 2025 after the past few difficult months. She said investors have been concerned about the “wall of debt” maturing over the coming years, but in her estimation “the debt load set to mature peaked in 2024 and will trend downward over the coming years.”
“Fundamentals are strong in most sectors with long-term supply shortages ... such as housing and industrial. The industrial sector should be supported by rising US manufacturing capacity and 'onshoring' trends and telecommunications REITs which own cell towers and data centers provide necessary infrastructure for the fast growing digital economy,” Brown said.
Similarly, Andrew Graham, founder and managing partner of Jackson Square Capital, is constructive on REITS in the coming year. He said valuations are “reasonable” compared to the S&P 500 and could be a decent place to generate “predictable but modest” returns. He added that commercial real estate fundamentals are stable and noted that transaction activity is improving.
“Earnings growth for the broad REIT group is expected to lag relative to the S&P 500, but adding a predictable dividend yield of close to 4 percent to earnings growth, should net something like 8 or 9 percent,” Graham said. “If you allow for some funds from operations (FFO) growth and multiple expansion, you could get to 10 or 11 percent return for 2025.”
Still positive, yet more opportunistic on a potential rebound in REITs is Chuck Etzweiler, senior vice president of research at Nepsis.
“If investors have a disciplined process, there are great opportunities that lie ahead in this space,” Etzweiler said. “As companies seek to demand workers move back to a respective home office environment, the bottom may be near, and we would seek to own individual properties and projects where we perceive great value. Being greedy while others are fearful may just be the appropriate response.”
Higher interest rates have the capacity to undo any REIT rally, said Tom Graff, chief investment officer at Facet. As a result, he expects REITs to trade almost in lockstep with longer-term interest rates in 2025.
“Anytime the 10-year Treasury yield falls, REIT stocks will probably rise, and vice versa,” Graff said. “Our view is that longer-term bond yields are unlikely to fall substantially unless the economy slows materially. Unless bond yields fall, REITs are likely to be underperformers.”
Finally, Chris McMahon, president and CEO at Aquinas Wealth and MFA Wealth, remains skeptical of REITs rebounding in 2025. In his view, the Fed's recent behavior further casts a shadow on future interest rate cuts, which are critical to keeping momentum in the housing sector.
A shortage of tradesman in the residential housing space is also a factor, McMahon said. A problem he said is compounded by the tragedy in California, which will draw skilled workers to the area and, in turn, slow projects in the rest of the country.
“There are also building supply shortages,” said McMahon. “The demand on limited resources will drive pricing of materials up, making prices higher and hurting returns in REITs. These factors have us thinking underweight in real estate allocation for 2025.”
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