4 REITs to Pick as Fed Lowers Rate and Signals Additional Cuts Ahead

Moumita C. Chattopadhyay
7 min read

Real estate investment trust (REIT) investors now have reasons to rejoice because the Fed officials have announced a 50-basis point (bps) cut to the federal funds rate to a range of 4.75%-5%. This comes amid indications of a moderation in inflation and a softening of the labor market. It marks the first downward move in four and a half years and comes to avert a labor market slowdown.

The Fedā€™s new dot-plot also indicates another 50 bps cut by the end of this year, another full percentage point reduction by the end of 2025 and half a percentage point decline in 2026.

The FOMC statement acknowledged that ā€œeconomic activity has continued to expand at a solid paceā€, as suggested by recent indicators. However, it noted that ā€œJob gains have slowed, and the unemployment rate has moved up but remains low.ā€ 

Fed has now revised its forecast for 2024 GDP growth, expecting it to now grow 2.0%, slightly down from 2.1% projected earlier, but reaffirmed its projections at 2% for 2025 and 2026. However, the projection for 2024 unemployment has been revised to 4.4% from 4% guided earlier.

REITs Grab Headlines When Fed Cuts Rates

Any rate cut, even a slight one, is good news for the rate-sensitive REIT industry. This sector is capital intensive, and its dependence on debt for business keeps investors optimistic about their performances in a rate-cut environment as the companies benefit from lower borrowing costs. Low interest rates contribute to higher valuations. Also, their dividend yield grabs investorsā€™ attention more than yields on fixed-income and money market accounts in times like these.

Over the years, REITs have improved their balance sheet strength and are well-poised to capitalize during both the ups and downs of the cycle. Per the latest data from the Nareit Total REIT Industry Tracker Series (T-Tracker) report, among total debt, the majority was unsecured at 79.2%, and 90.8% of the total debt was fixed rate. Also, leverage ratios were low, with debt-to-market assets at 34.1%, and the weighted average term to maturity of REIT debt was 6.5 years.

What Lies Ahead for REITs?

A resilient economy brings in more cheers for REITs as it acts as a tailwind for leasing activity. With the REIT industry offering a real-estate structure for several economic activities, real or virtual, the sectorā€™s prospects remain correlated to the health of the economy. A resilient or healthy economy entails more economic activities and empowers people to spend more. Demand for real estate shoots up, occupancy goes up, and landlords get more power to command higher rents. REITsā€™ earnings, cash flows and dividends gain strength. 

In the current macroeconomic environment, this means that the best set-up for REITs would be the one where rates are falling, and the economy makes a soft landing. This would imply lower financing costs while still maintaining solid cash flows from properties.

The inflationary period and high interest rates have impacted growth expectations, posing challenges for REITs and causing investors to retreat. However, the outlook for this asset class appears promising.

In the short term, the market will remain focused on potential rate cuts and economic data, prompting a reevaluation of REIT investments. However, in the medium to long term, REITs are likely to become a more attractive choice as rates decrease. Lower rates lead to reduced refinancing costs, which should drive higher expected earnings growth than previously anticipated and dividend increases.

A favorable cost of debt and equity will position REITs to capitalize on buying opportunities and expand externally. Over the years, REITs have strengthened their balance sheets, which will support their growth endeavors. Furthermore, limited construction activity in certain sectors due to high interest rates is expected to keep supply in check during 2026 and 2027, enhancing the fundamentals of the REIT sector.

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