Edwin Tan
Real estate stocks continued on their downward trajectory as Wall Street's April pullback intensified amid a hawkish Fedspeak, leading investors to dial back interest rate cut expectations significantly.
Real Estate Select Sector SPDR ETF declined by 3.65% this week, the Dow Jones Equity All REIT Total Return Index by 3.09% and the FTSE Nareit All Equity REITs by 3.45%. Comparatively, the S&P 500 Index retreated by 3.05%.
The economic activity in the U.S. expanded slightly, the Federal Reserve said in its April Beige Book report. But the Fed officials continued to indicate that the central bank was in no hurry to cut rates.
Commercial real estate activity was flat, with retail, hospitality and health care doing well, a report by Baird Equity Research noted, citing the Beige Book. The general tone of the Beige Book was that the real estate activity has not deteriorated since the start of 2024.
Long-term mortgage rates crossed the 7% mark for the first time this year. Home prices increased by 1.7% in Q1, a report by the Federal National Mortgage Association said. U.S. existing home sales slid 4.3% M/M to 4.19M in March vs. 4.180M expected and 4.38M prior. On a year-over-year basis, sales declined 3.7%. Housing starts dropped in March and building permits also slid more than expected.
Asking rents rose for the third straight month in March. Nearly 40% of renters think they will never own a home, the real estate brokerage Redfin reported last week.
Rent prices hold the key in whether US core inflation will trend lower over this year and longer, and in turn, whether the Fed will be moved to enact rate cuts, according to BNP Paribas.
"If rents do not improve as much as our base case but rather follow the contours of our upside scenario, we would envisage little to no improvement in core inflation and with it, fewer Fed rate cuts over our forecast horizon," BNP said.
However, a lack of Fed rate cuts is still not expected to pose a problem for U.S. public equity REITs. With their disciplined balance sheets, REITs may not be immune from higher interest rates, but they are reasonably well-insulated from them, Nareit's recent research note claims.
"Rising interest rates can create headwinds for financial and real estate markets, and REITs have certainly faced their fair share of challenges over the past couple of years as the sector has priced in news about interest rate hikes in real time. Although REITs have tended to underperform private real estate during past rate hikes, they have historically enjoyed a resurgence in total returns after monetary policy tightening cycles end," Nareit's senior vice president of research, Edward Pierzak, told Seeking Alpha.
REITs kicked off the Q1 earnings season on a mixed note. Crown Castle (CCI) posted better-than-expected earnings, revenue and adjusted EBITDA, even as the metrics declined sequentially and from a year ago, and maintained the 2024 guidance. The telecom tower REIT was downgraded at Argus, citing that the demand for wireless communication equipment is expected to stay sluggish through next year.
Prologis (PLD) trimmed its guidance for the full year as it prepares for a slower leasing environment for the next quarter or two, posting slightly weaker-than-expected Q1 earnings. Industrial REITs were the biggest losers among the S&P 500 real estate subsectors this week.
Medical Properties Trust (MPW) soared after guidance on liquidity transactions, impacting health care REITs overall.
Major REITs expected to report next week include AvalonBay Communities (AVB), Weyerhaeuser (WY), Healthpeak Properties (DOC), Getty Realty (GTY), Alexandria Real Estate Equities (ARE), AGNC Investment (AGNC), Equity Residential (EQR), Highwoods Properties (HIW), Pebblebrook Hotel Trust (PEB), Annaly Capital Management (NLY), Essential Properties Realty Trust (EPRT), Independence Realty Trust (IRT) and Empire State Realty Trust (ESRT).
Big real estate names expected to report next week include Anywhere Real Estate (HOUS) and CoStar Group (CSGP).
Fund Flows:
Funds continued to flow out of The Real Estate Select Sector SPDR Fund ETF, indicating pessimism in the investor community.
XLRE saw net outflows of ~$32.69M this week, compared to outflows of ~$100.35M last week, according to the data solutions provider VettaFi.
Seeking Alpha's Quant rating system continues to grade the ETF as Strong Sell, while SA analysts continue to rate the fund as Buy.
Subsector Performance: