INSIGHTS

On October 21, 2024

AAM Viewpoints — A New Market Regime for Listed REITs

We believe the market cycle has turned in favor of publicly traded real estate investment trusts — known as REITs — and we believe that new economy REITs are particularly well positioned for this new stage.

We see three key signals of a new regime for REITs:

1. A shift to lower interest rates has often been a favorable backdrop for this asset class. Interest rates dictate the financing costs of real estate and are a key driver for real estate asset values and REIT returns. Lower rates reduce borrowing costs for REITs, enabling them to finance acquisitions and developments less expensively and support asset values. Since 1990, listed REITs have had average annualized monthly total returns of 18.9% when growth and yields were down, which is the environment we are entering. By comparison, listed REITs have had average annualized monthly returns of -11.7% when growth was down but yields were up (the environment we’re moving away from). Additionally, falling rates typically increase the attractiveness of REIT dividend yields. This dynamic can drive higher demand for REIT shares, pushing up prices and resulting in higher total return potential for investors.
2. REITs have historically traded at an earnings multiple premium to stocks, but that’s not true right now. Currently, REITs are at a discount to stocks. Such an attractive valuation is not common and often results in better performance from these levels. As of August 31, U.S. REITs were trading at a 4.4x earnings multiple discount to the S&P 500 Index, compared with the historical median spread of a slight premium. This is notable because, while past performance is not an indicator of future results, REITs have returned 19.2%, on average, in the 12-month periods following REIT multiple discounts of this magnitude. (In the same periods, the S&P 500 Index returned an average of 11%.)
3. Publicly traded REITs are well positioned now to go on acquisition offense. The cost of financing for REITs on the unsecured bond market is attractive. Credit spreads are tight. And, as a result, these REITs are positioned to be net acquirers of real estate properties in the upcoming stage of the cycle. Meanwhile, healthcare REITs are on an acquisition hunt, utilizing lower costs of debt to expand. Markets are beginning to price in this REIT regime shift. Listed REITs generated total returns of nearly 17% in the third quarter of 2024. Every month in the quarter was positive, with July at 7.2%, August at 5.6% and September at 3.2%. Listed REITs outperformed the S&P 500 Index by almost 11 percentage points in the third quarter and the Nasdaq by more than 14 percentage points.

New economy REITs, which focus on sectors like data centers, logistics, and cell towers, are especially well positioned. We maintain a positive outlook on data centers and the tower industry, amid favorable technology trends driving demand, including artificial intelligence, and the continued adoption of 5G cellular technology.  

In logistics, industrial REITs continue to see healthy demand from e-commerce-related tenants, as well as from companies seeking to avoid supply chain disruptions. We believe self-storage is also attractive — particularly outside of the U.S., due to constrained supply and solid (although decelerating) demand.

In addition, longer-term challenges in housing affordability throughout the U.S. should continue to compel more households to rent instead of buy the homes they live in, a benefit to REIT sectors such as single-family homes. We also see value in senior-housing landlords, for which longer-term occupancies and cash flow growth should be strong, fueled by demographic trends.

CRN: 2024-1003-12029 R

Opinions in this piece are those of Cohen & Steers and are not necessarily that of AAM.