Bigger Pockets: REITs Might Be in Jeopardy

Market sentiment has shifted negatively in the past few weeks. Rising uncertainty has led to a selloff in all asset classes, even supposedly safe ones like bonds.

Even real estate has suffered. The selloff in bonds has pushed interest rates higher, and kept mortgage rates high as well. That makes it more difficult for the housing market to match supply and demand. It also puts real estate at risk of declining to meet the current supply and demand equilibrium.

During a recession, real estate investment trusts (REITs) have a history of declining 17.6% on average. That’s a bit less than the stock market, which typically has a 20-50% bear market in a recession.

Unlike your home, however, REIT valuations can be changed by the market every day. And as a result, data shows that REITs underperform privately owned properties in the four quarters proceeding a recession.

On the plus side, REITS outperform in the four quarters after a recession. So investors who buy REITs can see higher returns, in addition to the cash flow that REITs provide.

Of course, today’s REITs offer robust diversity against several types of real estate. Today’s buyers should look at data center REITs, which play to longer-term trends in AI. And REITS related to healthcare, which has strong long-term demographics behind it. And finally triple-net lease REITs, which pass on rising costs to their renters.

To see the full advantages and disadvantages of REITs right now, click here.