Real estate stocks are sinking to start 2024. Why some Wall Street analysts are still bullish.
Real estate stocks have been a bust so far in 2024.
The rate-sensitive sector has underperformed the broader stock market this month as investors worry the Federal Reserve won't bring down the cost of borrowing as quickly as markets hope. The Real Estate Select Sector SPDR Fund (XLRE) — whose top holdings include REITs like Prologis (PLD) and American Tower (AMT) — has dropped about 3% year to date while the SPDR S&P 500 ETF Trust (SPY) gained more than 1%.
This comes after a tough year for commercial real estate when property values plunged and office vacancy rates hit a new record. Meanwhile, investor anticipation that interest rates will stay higher for longer is weighing on equities. As of Monday, markets were putting the probability the Fed will issue a quarter-point cut in March at 41%, down from nearly 77% a week ago.
But analysts at Wedbush remain optimistic about the landscape for REITs once the path for the Fed becomes clearer.
"One might conclude the REITs are still mainly driven by macro trends and other related factors (e.g., better than expected retail sales in December = less ability for the Fed to cut rates)," wrote Wedbush analysts Richard Anderson and Jay Kornreich in a note to clients Monday.
"In our view, the resilience of the economy, its strong wage growth and highly-employed US population is ultimately a good thing in the form of stable/growing demand for real estate in most of its forms. Once clear evidence of a range bound Treasury yield is achieved, and it will, we expect REIT shares to go on a tear," the analysts added.
Wedbush isn't alone in its thinking.
"The second half is definitely looking like a better setup for REITs," Nick Thillman, equity senior equity research analyst at Baird, told Yahoo Finance.
He added that "we'll have a little bit better visibility on ... the rate environment, and then you also will have a little bit of the digestion of supply."
He went on to explain that "since borrowing's been a little bit tight here for the last 18 months, essentially, there's no new supply coming on. So the growth outlook starts looking better in the second half of the year and into 2025."
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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