Expectations the Fed would cut interest rates in September supported gains for REITs and related ETFs. But publicly traded real estate assets endured some profit-taking following the Fed’s first rate cut in four years.
The ALPS Active REIT ETF (REIT ) wasn’t immune to that trend. Yet that’s not an indictment of the actively managed fund. Not with Fed funds futures implying another 100 bps worth of potential rate cuts through Q2 2025. So the Fed could be of more assistance to REIT and its peers over the near to medium term.
Inflation data appears to be cooperating. The September reading of the Consumer Price Index came in higher than expected, at 2.40, below the 2.50% seen in August. That eked out the smallest monthly increase since February 2021. That could set the stage for the Fed to be aggressive with rate cuts over the near term. And that could potentially benefit REIT along the way.
Why REIT Could Rise
The Fed is poised to unveil additional rate cuts and recession expectations are rapidly dwindling. So the macroeconomic stars could be aligning for real estate stocks and ETFs such as REIT.
“The best scenario for REITs is one where interest rates are declining, and the economy is moving towards a soft landing,” noted Nareit. “If financing costs for real estate are improving while the cash flow at a property is still doing reasonably well, then the value of that property should rise. [There’s] still healthy debate around the trajectory of growth [expectations. But it’s] a much better backdrop for listed REITs and values are still cheap relative to the broader equity market.”
As Nareit pointed out, lower interest rates are pivotal for REITs. That’s because that leads to lower financing costs. Reduced financing costs lead to healthier balance sheets and better support for dividends. The latter is often the primary reason investors have embraced listed real estate.
Additionally, lower interest rates could signal to market participants that the darkest clouds have passed the real estate sector. Don’t underestimate the importance of that, following a few years of rough news flow.
“Looking at the broader commercial real estate market, challenges associated with the higher for longer rate environment were exacerbated by the regional banking crisis, which contributed to tighter liquidity,” concluded Nareit. “At the same time, there were negative headlines around the mountain of commercial real estate debt maturities and distressed loans in the office sector in particular. As a result, there has been a sharp decline in transaction activity for the past two years due to pricing uncertainty and fears about the economy.”
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