REITs outperform other markets in June, showing strength of CRE

Real Estate Investment Trusts (REITs) performed better than the Dow Jones in June, the data shows, demonstrating the strength of commercial real estate in a challenging macroeconomic environment. REITs can sometimes be used as a leading indicator for private real estate investment performance, which is why CONTI Capital monitors their trajectory.

While All Equity REITs and the broader stock market all fell in June, REIT total returns fell by 7.2% while the Dow Jones fell by 8.4%. REITs are down by 19.2% year-to-date, while the Dow Jones is down 21.3%. In line with the performance of the stock market, REIT returns fell sharply in the first half of the month before recovering over half of its losses by the end of the month.

Within REIT property subsectors, apartment REITs only fell by 5.3%, faring better than office (15%) and retail (9.5%). Industrial fared only slightly better than multifamily, falling by 5.0%. Despite challenges facing the single-family housing market due to rising mortgage rates, multifamily remained a top performing asset class in June.

Markets have been choppy as the Federal Reserve has signaled its intention to continue aggressively hiking interest rates in order to combat inflation. Investors looking for a safe haven for their capital, or simply looking for diversification of their portfolio, might look to investment in commercial real estate, whether publicly traded or private. Private equity multifamily investments in particular have a reputation as a hedge against inflation.

It’s CONTI’s view that public and private real estate investment each have their strengths. REITs are more liquid than private investments, but they also face a myriad of legal limitations on the handling of their properties. Private real estate investment, meanwhile, offers some of the same perks as REITs such as potential strong returns and tax benefits, while also offering investors more control over the actual real estate and fewer legal hurdles on how those assets are operated.

Private real estate has less of a correlation with the stock market than REITs do, meaning they’re typically less volatile, which is particularly relevant given the broad stock market sell-off that occurred in the second quarter of the year. Private real estate correlates more closely with inflation and is more easily able to pass price increases onto tenants.

Current macroeconomic headwinds suggest an increasing likelihood of a recession, though there’s still a chance the U.S. could avoid a recession even as it experiences a “soft landing” and slowed economic growth. In the current landscape, CONTI is assured of the relative strength and stability of multifamily real estate performance. The June REIT performance data only reinforces this view.