Top REITs to Watch as US Real Estate Bounces Back On FED Interest Rate Cut Bets

Top REITs to Watch as US Real Estate Bounces Back On FED Interest Rate Cut Bets

A tighter monetary policy environment characterized by high-interest rates has significantly affected the real estate sector. The US commercial real estate sector has felt the full brunt of the Federal Reserve hiking to 22-year highs of 5.25% and 5.50%. Consequently, property prices have tumbled by over 10% since the Fed started hiking in 2022 to tame runaway inflation, erasing the previous two years’ gains.

The sector is in a precarious position as high-interest rates have triggered high borrowing costs, dampening market demand. Unlike at the height of the COVID-19 pandemic, when the Fed cut rates to near zero, investments in the sector appear more expensive owing to the high borrowing costs.

Prices of commercial properties and offices have dropped significantly amid the high-interest rates, with vacancy rates soaring to levels above other countries since the pandemic. The plunge has already rattled confidence among some of the biggest banks that espouse the sector, given the developments at the height of the subprime mortgage crisis in 2007.

Nevertheless, commercial real estate prices in the US remain generally stable compared to previous Fed rate hike cycles. For instance, the Fed rate hikes between 2004 and 2006 were subsequently followed by a recession, with the real estate sector being the main trigger. The resilience of the US economy amid the high interest rates has helped support the industry even as prices have come down.

A solid labor market characterized by rising wages has also averted the risk of real estate collapsing, as was the case at the height of the 2007 financial crisis. Likewise, there appears to be some light at the end of the tunnel, with the Fed nearing the end of a tightening cycle. Growing expectations that the central bank will start cutting in the second half of the year has once again reinvigorated sentiments and prospects in the key economic sector.

Goldman Sachs Asset Management has indicated that it will start investing because the embattled sector shows signs of bottoming out. According to analysts at the investment firm, the market is bottoming out as they are seeing a floor in prices as set by buyers. Likewise, the firm has already started deploying most of its investment funds into properties in Europe and Japan.

Given the high-interest rate, the US economy’s strength is one factor that should support the real estate sector and fuel a rebound. While a V-shaped recovery of the industry is highly unlikely, the slow pace of recovery is welcome, with British fund manager Schroder already eyeing opportunities in the US commercial property market.

Experts expect struggles in the real estate sector to abate with time as professionals continue to analyze the industry, trying to uncover hidden value. Several sectors of the broader industry still need to be invested, providing an arena that investors can tap into and generate significant value.

The real estate sector has always provided some of the best risk-reward opportunities for hedging against inflation and generating significant returns. In addition, the sector offers some of the best opportunities for diversifying investment portfolios.

While buying individual properties can be difficult and expensive for individual investors, there are stocks of companies that offer significant exposure to the sector. In addition, there are real estate investment trusts that provide an opportunity to gain exposure to a diversified portfolio of properties and generate passive income through rental income.

Some of the top real estate investment trusts expected to outperform as the overall real estate sector  bounces back include:

Public Storage

It is a real estate investment trust flexing its muscle in the burgeoning storage facility sector. The REIT acquires, develops, and owns self-storage facilities across the US. It owns over 3,000 self-storage facilities in 40 states and over 200 million net rentable square feet.

The REIT is looking for ways to diversify its high-quality portfolio of self-storage facilities through acquisitions. Late last year, it acquired Simply Self Storage for $2.2 billion, which is expected to strengthen the quality and breadth of the portfolio.

Park Hotels & Resorts

Park Hotels & Resorts is the second-largest US lodging real estate investment trust. Spun off Hilton Worldwide Holdings, it mainly focuses on the upscale hotel segment after selling a significant chunk of its lower-quality US hotels to focus on quality assets.

With the hotel and travel industry in recovery mode following the COVID-19 slowdown, it remains one of the REITs well positioned to capitalize on any upside. Occupancy rates in its hotel chains are rising, which should drive higher operating margins. The acquisition of Chesapeake Lodging Trust is also expected to provide leeway for growth.

Macerich

Macerich stands out as a real estate investment trust owing to its high-quality properties in densely populated and attractive markets across the US. The REIT boasts prime properties in California, the Pacific Northwest, and metro New York, from which it generates rental income.

The REIT’s over 40 million square feet of real estate in 44 regional town centers makes it one of the most stable REITs. Additionally, it has sold over $4 billion worth of lower-quality assets over the past 12 years and generated significant shareholder value. It also continues to ramp up its portfolio through redevelopment, acquisitions, and asset sales in the race to generate solid earnings for investors.

Welltower

Welltower is a real estate investment trust that has set out to drive the transformation of the healthcare infrastructure industry. It boasts a vast portfolio of high-quality senior living properties and properties post-acute providers use.

As senior housing markets continue to bounce back following the COVID-19 pandemic, Welltower is one of the biggest beneficiaries. The REIT continues to register high occupancy rates in its facilities as a growing aging population in the US continues to fuel demand.

Ventas

Ventas is a real estate investment trust that invests in senior housing communities to provide valuable services to residents. Its primary goal is to deliver robust and sustainable shareholder returns by investing in properties that benefit from large populations.

Likewise, it is a top REIT for gaining exposure to healthcare facilities, which positions it to benefit from the Affordable Care Act. The REIT is well positioned to help because of its high-quality assets in senior housing, medical house buildings, life sciences, and hospital segments. Recently, it has acquired New Senior Investment Group to expand its exposure in the sector.

Pebblebrook Hotel

Pebblebrook Hotel is a REIT for investors seeking exposure to the real estate sector through hotel and motel investments. The REIT holds the most extensive portfolio of US lodging REITs, owning 47 hotels and resorts totaling 12,200 guest rooms across 12 resort markets in the US.

Over the years, Pebble Brook’s portfolio has generated higher revenue per available room and EBITDA margin than its peers. Its merger with LaSalle has opened the door for the REIT to pursue new revenue opportunities as it looks for avenues of creating additional shareholder value. The REIT is also trimming its operational costs to bolster its margins and generate significant shareholder value.

Kilroy Realty Corp

Kilroy Realty Corp has carved a niche in acquiring, developing, and managing mixed properties across Los Angeles, San Diego, San Francisco Bay Area, and Austin, Texas. It boasts a vast portfolio of 121 properties comprising premier office space life science buildings, among other mixed-use real estate properties.

Unlike other REITs, it has positioned itself to benefit from the burgeoning life sciences sector by aligning its portfolio with clients’ sustainability requirements. Consequently, it works round the clock to acquire and develop high-quality real estate properties in the technology and life sciences sectors.

Healthpeak Properties

Healthpeak is another high-profile REIT that focuses on healthcare facilities. It boasts high-quality properties and exposure to the healthcare industry and is well-positioned to benefit from the Affordable Care Act.

The REIT boasts high-quality assets in top markets that attract credit-grade tenants and generate significant returns in terms of rental income. It has also completed a $5 billion merger deal with Physician Realty Trust, gaining access to high-quality medical office buildings to supplement its portfolio.

Investing via ReelShares Commercial Real Estate Fund

The Fed’s cutting interest rates should significantly impact the real estate sector, which has experienced slow growth over the past two years. With earnings in the industry expected to grow by over 40% over the next five years, now may be the best time to eye opportunities in the sector through REITs.

Additionally, the ReelShares Commercial Real Estate Fund offers an attractive and more accessible way of gaining exposure to the real estate sector as it bottoms out. The fund boasts a diversified private and public commercial real estate equity and debt securities portfolio. It seeks to invest 60%—90% of its portfolio in private commercial real estate securities and 40%—10% in public commercial real estate securities.

The fund aims to deliver an annual return of 18.7%. You may purchase ReelShares Commercial Real Estate Fund shares directly from Reel Shares or through a financial intermediary. The shares can be traded on the NYSE.

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