From left: AvalonBay Communities’ Timothy Naughton and Equity Residential’s Mark Parrell (Getty, NMHC, Avalon Bay Communities)
There’s no sugar-coating it: This has been a bad year for publicly traded REITs.
The U.S. MSCI index, which tracks real estate investment trusts, has plunged over 20 percent in the past 12 months, the steepest fall since REITs lost 38 percent of their value in 2008.
But a report by Toronto-based Hazelview Investments views that slide as a fear-based reaction, not one grounded in the trusts’ underlying performance.
“Fundamentals went out the door in 2022 as markets focused on high inflation and hawkish monetary policy,” said Corrado Russo, head of public real estate investments at Hazelview.
As evidence, the firm points to the comparatively stable performance of privately held investments, claiming that public REIT valuations are 26 percent below benchmarks for private real estate.
It adds that REITs with property types well-suited to reprice in an inflationary environment like this one — multifamily, single-family rentals and self-storage — have seen shares fall the farthest.
The market cap of AvalonBay Communities, the most valuable apartment REIT, has plummeted 31 percent since January. Equity Residential, the second largest, fell 30 percent.
Meanwhile, the median national rent in November was up 9 percent year-over-year.
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Similarly, the largest of the self-storage firms, Public Storage, was down 17 percent year-to-date and Extra Space Storage was off 28 percent at the time of the report, even as the asset class’ rents have soared and “fundamentals remain healthy,” RentCafe reported.
Single-family rental REITs have slipped about 30 percent, too. Investment advisor Hoya Capital, writing for Seeking Alpha last week said, the stocks had been “swept up by stiff headwinds across the housing industry from the historic surge in mortgage rates,” even though homebuilders have pulled back from an already supply-constrained market.
“In other words, REITs are exceptionally cheap right now, especially the higher quality
companies,” the Hazelview report author writes.
Heading into 2023, Hazelview said an easing of rate hikes could help bring REIT’s valuations closer in line with their fundamentals.
Samuel Sahn, a portfolio manager at Hazelview, said investor anticipation of rate hikes, more than anything else, hurt REITs this year.
The MSCI U.S. REIT index tumbled over 23 percent from mid-August to mid-October after the Fed’s July hike failed to tame inflation and triggered another bump of 75 basis points in September. The index has since rebounded over 14 percent.
Sahn said the uncertainty around how high rates may surge makes it tough for markets to gauge the value of the underlying assets REITs own.
“Rates hikes don’t necessarily even need to reverse to shift the valuation paradigm, they just need to moderate or stop going up and be more predictable,” he said. Sahn added that with more clarity in the market, investors can make decisions based on fundamentals.