How will REITs do in a recession?
An analysis of the last six recessions shows that, on average: REITs underperformed private real estate in the four quarters before a recession, REITs outperformed private real estate during a recession, and. REITs outperformed private real estate in the four quarters after a recession.
The FTSE Nareit All Equity index, consisting of REITs that exclude mortgages, generated a 15.9% annualized return during recessions and 22.7% in the year following the end of a downturn, according to the National Association of Real Estate Investment Trusts.
With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts. However, REIT stocks are only as good as the properties they own — and some real estate sectors may be better positioned than others.
Right now, REITs (VNQ) are at an inflection point and time is running out for investors. But now as we head into 2024, we expect the polar opposite and this should lead to an epic recovery across the REIT sector. The Fed expects at least 3 interest rate cuts in 2024 and the market is predicting even more.
Even with inventory levels driving up prices, investing in real estate during a recession could still result in significant long-term returns.
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
Although the higher cost of borrowing was a headwind, many segments of real estate investment trusts (REITs) continued to show strong fundamentals and supply-demand dynamics. 2024 could be a calmer year if interest rates level off and the pace of commercial real estate transactions normalizes.
But despite that, most REITs have kept growing their dividend. Most of them hiked in 2022, 2023, and will hike again in 2024. This is the ultimate proof that REITs are doing better than what the market appears to believe.
April 2, 2024, at 2:50 p.m. Real estate investment trusts, or REITs, are a great way to invest in the real estate sector while diversifying your options. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
How are REITs expected to perform in 2024?
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.
REITs have typically enjoyed strong absolute and relative total return performances after monetary policy tightening cycles end. The valuation divergence between REITs and private real estate will likely converge in 2024, making REITs an attractive option for investors.
As we dive into 2024, the Fed's accommodative approach to tackling inflation is likely to provide an impetus to the REIT sector, which depends highly on the debt market to carry out business activities. These companies benefit from lower borrowing costs. Moreover, low interest rates contribute to higher valuations.
Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
Commercial Properties
As with residential rentals, the ideal properties are those that need few upgrades and already have long-term tenants. For short-term investments, location is also important. Recessions generally have less effect on high-income neighborhoods, so focus your efforts there.
Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors. Consider consulting your tax adviser before investing in REITs.
The growing demand for retail space will drive the performance of retail REITs. In this article, we have handpicked four REITs that have outpaced the real estate market's growth on a year-to-date basis and are poised to continue their winning streaks in 2024.
Do REITs Have High Leverage? In some cases, REITs use lots of debt to finance their holdings. Some trusts have low amounts of leverage. It depends on how it is financially structured and funded and what type of real estate the trust invests in.
REITs historically rebound when interest rates pivot and have the potential for rent growth. Realty Income, Agree Realty, VICI Properties, Essential Properties Trust, and American Tower are strong picks for long-term growth and income.
Do REITs benefit from inflation?
Finally, as owners of real assets, REITs typically enjoy an appreciation in portfolio value along with the price level. With rents and values tending to increase with prices, REIT dividends help provide a reliable stream of income even during inflationary periods.
Because REITs use debt to purchase investments, rising interest rates could mean these companies would have to pay more interest on future loans. This could in turn reduce their return on investment. Because of this, REITs could potentially lose value when interest rates rise.
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
Due in part to their attractive current yields, REITs have tended to deliver annualized total returns to investors of 10 to 12 percent over time.
During the REIT operation period that can last up to 7 to 10 years, the sponsor manages its properties to produce an income stream. REIT management seeks to monetize the portfolio in an effort to realize a capital gain for investors, although there's always the risk of a loss instead.
References
- https://www.investopedia.com/articles/investing/060916/top-5-ways-hedge-against-inflation.asp
- http://static.fmgsuite.com/media/documents/3ab6f145-e07e-452a-a2ac-85b588a2892e.pdf
- https://www.investopedia.com/articles/stocks/08/industries-thrive-on-recession.asp
- https://www.concreit.com/blog/what-happens-to-real-estate-in-recession
- https://www.linkedin.com/pulse/recession-proof-real-estate-investing
- https://www.forbes.com/sites/qai/2023/01/08/are-we-headed-for-a-richcession-why-the-wealthy-stand-to-lose-the-most-if-the-economy-stalls/
- https://www.investopedia.com/articles/personal-finance/080714/how-do-real-estate-agents-get-paid.asp
- https://www.fidelity.com/learning-center/trading-investing/outlook-real-estate
- https://www.reit.com/news/blog/market-commentary/hike-stop-and-bounce-reit-performance-after-monetary-policy-tightening
- https://www.investopedia.com/articles/08/recession.asp
- https://smartasset.com/financial-advisor/how-long-do-recessions-last
- https://www.bankrate.com/real-estate/buying-home-during-recession/
- https://www.schwab.com/learn/story/risks-reits
- https://www.acorns.com/learn/investing/industries-most-affected-by-a-recession/
- https://www.rocketmortgage.com/learn/best-time-of-year-to-buy-a-house
- https://seekingalpha.com/article/4636210-reit-crash-more-they-drop-more-buy
- https://www.houzeo.com/blog/best-time-to-sell-a-house-in-california/
- https://www.fool.com/the-ascent/personal-finance/articles/3-ways-to-get-rich-during-a-recession/
- https://www.sec.gov/files/reits.pdf
- https://blog.homesandland.com/tips-for-selling-your-home-in-a-recession
- https://37parallel.com/four-of-the-best-investments-in-a-recession/
- https://jetstreamtech.io/what-happens-to-real-estate-agents-when-the-market-crashes/
- https://theclose.com/why-realtors-fail/
- https://www.investopedia.com/articles/investing/031915/what-are-risks-reits.asp
- https://exactestate.com/blog/post/239/property-management/how-recession-proof-is-your-rental-property/
- https://www.tiktok.com/@kriskrohn/video/7249446262897085742
- https://www.investopedia.com/ask/answers/102015/do-interest-rates-increase-during-recession.asp
- https://www.wealthmanagement.com/alternative-investments/fund-managers-are-bullish-reits-2024
- https://www.reit.com/news/blog/market-commentary/2024-reit-performance-outlook
- https://www.altabank.com/who-benefits-from-a-recession-and-how
- https://www.bankrate.com/investing/good-time-to-buy-reits/
- https://www.forbes.com/sites/qai/2023/01/14/does-rent-go-down-during-a-recession-what-renters-and-real-estate-investors-can-expect/
- https://www.bankrate.com/real-estate/selling-house-during-recession/
- https://seekingalpha.com/article/4659819-why-reits-will-likely-surge-2024
- https://quadwalls.com/blog/should-i-sell-my-house-now-or-wait/
- https://www.realvolve.com/blog/how-real-estate-agents-can-overcome-these-4-common-fears/
- https://www.shopify.com/blog/how-to-make-money-in-a-recession
- https://www.ziprecruiter.com/Salaries/First-Year-Real-Estate-Agent-Salary--in-California
- https://www.fool.com/the-ascent/banks/articles/heres-what-happens-to-your-savings-in-a-recession/
- https://www.noradarealestate.com/blog/real-estate-investing-for-beginners/
- https://brandassets.principal.com/m/7f026ba27853f652/original/Principal-Listed-REITs-2024-Outlook.pdf
- https://www.linkedin.com/pulse/what-happens-real-estate-during-recession-the-future-gp-piwwc
- https://www.smithhearn.com/blog/why-do-realtors-have-a-bad-reputation/
- https://www.pionline.com/interactive/reits-historically-perform-well-during-and-after-recessions
- https://www.forbes.com/sites/forbesfinancecouncil/2024/01/18/why-recessions-can-be-a-good-time-to-invest-in-real-estate/
- https://finance.yahoo.com/news/4-reit-stocks-set-continue-131100709.html
- https://ftp.ssec.wisc.edu/ABI/kaba/REIT/ch2.pdf
- https://www.theagencyre.com/blog/pros-and-cons-of-working-with-a-real-estate-agent/
- https://www.investopedia.com/ask/answers/101314/why-do-real-estate-agents-fail.asp
- https://www.businesstimes.com.sg/wealth/winds-change-s-reits-interest-rates-normalise
- https://www.plecto.com/blog/motivation/real-estate-challenges/
- https://fitsmallbusiness.com/why-real-estate-agents-fail/
- https://www.cpm.properties/would-a-recession-negatively-impact-my-rental-properties
- https://www.noradarealestate.com/blog/should-i-buy-a-house-now-or-wait-for-recession/
- https://www.bankrate.com/real-estate/housing-market-2024/
- https://www.newstatesman.com/business/2023/03/recessions-make-rich-richer
- https://www.reit.com/news/blog/market-commentary/2024-reit-market-outlook
- https://www.houzeo.com/blog/housing-market-recession/
- https://www.investopedia.com/ask/answers/060215/what-average-debtequity-ratio-real-estate-companies.asp
- https://www.housingwire.com/articles/5-steps-to-succeed-as-a-real-estate-agent-in-a-down-market/
- https://seekingalpha.com/article/4675769-this-could-be-the-best-time-in-my-lifetime-to-buy-reits
- https://www.reit.com/investing/investment-benefits-reits/reits-and-inflation-protection
- https://finance.yahoo.com/news/3-types-reits-outperformed-p-091300103.html
- https://realestatelicensewizard.com/how-to-tell-real-estate-agent-not-interested/
- https://www.wealthbuilders.org/is-it-a-good-time-to-invest-in-real-estate-2024-housing-market-outlook/
- https://berniegallerani.com/100k-new-real-estate-agent/
- https://www.kdci.co/outsourcing-blog/post/10-ecommerce-traffic-generation-strategies-that-can-drive-more-visitors-to-your-online-store
- https://www.truehold.com/post/challenges-of-being-a-real-estate-agent
- https://www.nasdaq.com/articles/billionaires-bill-gross-steve-cohen-and-leon-cooperman-predict-a-recession-is-coming.
- https://realestatelicensewizard.com/worst-states-to-be-a-real-estate-agent/
- https://money.usnews.com/investing/articles/how-to-invest-when-interest-rates-are-cut
- https://www.carlylefinancial.com/blog/if-the-dollar-collapses-what-happens-to-your-house/
- https://www.edwardjones.com/sites/default/files/acquiadam/2020-09/mortgage-reits-high-yield-but-high-risk.pdf
- https://www.linkedin.com/pulse/importance-stress-management-real-estate-agents-how-find-josie-rees-f6tcc
- https://smartasset.com/personal-finance/is-my-money-safe-in-the-bank-during-a-depression
- https://www.reit.com/news/blog/market-commentary/how-does-inflation-affect-reit-and-stock-performance
- https://seekingalpha.com/article/4679082-3-reits-that-will-hike-their-dividend-in-2024
- https://www.conference-board.org/publications/industries-that-will-have-most-layoffs-in-recession
- https://rsmus.com/insights/services/business-tax/reits-must-be-aware-of-the-unique-tax-rules-for-hedging-instrume.html
- https://www.noradarealestate.com/blog/how-much-did-housing-prices-drop-in-2008/
- https://www.tomferry.com/blog/87-of-all-agents-fail-in-real-estate/
- https://blog.socotracapital.com/how-to-invest-in-real-estate-during-a-recession
- https://curbio.com/curb-appeal-blog/bulletproofing-your-real-estate-business/
- https://www.bankrate.com/real-estate/should-i-sell-my-house-now-or-wait/
- https://www.realized1031.com/blog/are-reits-a-good-investment-during-inflation
- https://pacresmortgage.com/knowledge-center/news-insights/recession-home-value
- https://www.linkedin.com/pulse/what-does-recession-mean-housing-market-bestrealestatemarket-jsskc
- https://www.shopify.com/uk/blog/how-to-make-money-in-a-recession
- https://www.businessinsider.com/personal-finance/recession-save-more-cash-strategies-2022-12
- https://www.doorloop.com/blog/does-rent-go-down-in-a-recession
- https://www.forbes.com/sites/goldiechan/2024/02/09/5-trends-in-layoffs-for-2024-and-which-industries-are-recession-proof/
- https://www.thebalancemoney.com/when-will-housing-prices-drop-again-4773140
- https://www.travelers.com/resources/business-industries/small-business/recession-proof-products-services
- https://www.spglobal.com/spdji/en/documents/research/the-impact-of-rising-interest-rates-on-reits.pdf
- https://www.nasdaq.com/articles/heres-why-2024-could-be-great-for-reits:-4-stocks-to-buy-now
- https://money.usnews.com/investing/articles/best-reits-to-buy
- https://www.investopedia.com/articles/investing/100115/5-recession-resistant-industries.asp
- https://www.upnest.com/1/post/is-real-estate-agent-a-recession-proof-career/
- https://www.nasdaq.com/articles/do-prices-go-down-in-a-recession-heres-what-usually-gets-cheaper
- https://www.usatoday.com/story/money/columnist/krantz/2012/10/25/reit-real-estate-property/1637063/
- https://www.dpimc.com/articles/inflation-rising-rates-recession-oh-my-reits-as-a-road-to-outperformance
- https://www.adhischools.com/blog/The-Five-Hardest-Things-About-Being-A-Realtor
- https://money.usnews.com/investing/articles/best-investments-during-a-recession
- https://www.experian.com/blogs/ask-experian/pros-cons-investing-in-reits/
- https://www.sofi.com/learn/content/reit-investing-pros-and-cons/
- https://www.gcfrog.com/2023/10/18/things-real-estate-investors-can-do-to-survive-and-thrive-during-a-recession/
- https://www.fool.com/the-ascent/buying-stocks/articles/this-is-who-ends-up-rich-when-the-stock-market-crashes/
- https://www.forbes.com/sites/qai/2022/08/24/is-it-true-that-cash-is-king-during-a-recession/
