Funtap Whenever there is a fundamental shift in economic or market conditions, new winners and losers are born. Back in 2022, when the Fed started increasing the interest rates at an accelerated pace, the rate sensitive asset classes experienced a sharper drop than the ones that can easily pass through higher financing costs and the inflationary pressures to their customer base. A specific asset class that has been negatively impacted by the surge in interests rates and the subsequent strengthening of a higher for longer scenarios is the equity REITs.
While there are some relatively idiosyncratic factors that have also contributed in depressing the valuations (e.g., work from home dynamics rendering parts of the office stock obsolete), most of the pressure has stemmed from the elevated duration factor.
The logic is as follows - the longer and more fixed cash flows there are in the future, the higher the duration factor, which, in turn, magnifies the asset price response to a changed in the interest rate environment. In the chart below, we can nicely see how the broader REIT market has significantly lagged behind the S&P 500. Plus, the gap has become wider starting from 2022, when the Fed started to hike.
YCharts Having said that, this specific dynamics creates, in my opinion, huge opportunities for REIT investors. The capital movement away from the broader REIT market has automatically introduced more favorable multiples across the board. Granted, quite many REITs - especiall.
