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REITs Rejoice as the Fed Indicates Three Rate Cuts in 2024
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After having a lot to worry about rate hikes in the past several months, real estate investment trust (REIT) investors now have enough reasons to rejoice. The Fed officials have held the benchmark rate steady, a move that was widely anticipated. But what was more encouraging was the signal from the Fed that it is done with rate hikes this time around and forecasting three rate cuts for next year. The dot plot further indicates another four rate cuts in 2025, lowering the rate by a full percentage point.
These rate-cut projections bring REITs to the forefront. The FTSE NAREIT U.S. Real Estate Index for all equity REITs gained 3.71% yesterday. There were increases across all asset types, with office, industrial and retail categories registering decent gains.
Notably, almost all REIT stocks, big or small and from different asset categories, including Prologis (PLD - Free Report) , Alexandria Real Estate Equities Inc. (ARE - Free Report) , The Macerich Company (MAC - Free Report) and Innovative Industrial Properties, Inc. (IIPR - Free Report) , moved higher.
REITs’ dependence on debt for business keeps investors optimistic about their performances in a rate-cut environment as the companies benefit from lower borrowing costs. Moreover, low interest rates contribute to higher valuations. Also, their dividend yield grabs investors’ attention more than yields on fixed-income and money market accounts in times like these.
Specifically, the Fed officials’ median projections for the federal funds rate by the end of December 2024 is 4.6%, down from the 5.1% stated earlier, suggesting the comfort of the Fed officials with the easing of the inflation rate and the economy holding on well. With a full percentage point decline expected in 2025 and another spate of reductions in 2026, the median projection for the federal funds rate by the end of December 2026 is pegged at 2.9%, which is close to the long-run outlook.
The revised outlook also indicates reduced inflation for the current and upcoming years, with the Fed's preferred price index increasing 2.4% in 2024, excluding food and energy.
Moreover, the projections for the U.S. GDP growth rate have been upgraded to 2.6% from the 2.1% stated in September. While the GDP is expected to grow 1.4% in 2024, close to the 1.5% mentioned earlier, the projections for unemployment have been unchanged.
There are pockets of strength amid this scenario, with the REIT industry offering a real-estate structure for several economic activities — real or virtual. Investors should keep a close watch on the REIT stocks to grab solid opportunities in this special hybrid asset class.
Image: Bigstock
REITs Rejoice as the Fed Indicates Three Rate Cuts in 2024
After having a lot to worry about rate hikes in the past several months, real estate investment trust (REIT) investors now have enough reasons to rejoice. The Fed officials have held the benchmark rate steady, a move that was widely anticipated. But what was more encouraging was the signal from the Fed that it is done with rate hikes this time around and forecasting three rate cuts for next year. The dot plot further indicates another four rate cuts in 2025, lowering the rate by a full percentage point.
These rate-cut projections bring REITs to the forefront. The FTSE NAREIT U.S. Real Estate Index for all equity REITs gained 3.71% yesterday. There were increases across all asset types, with office, industrial and retail categories registering decent gains.
Notably, almost all REIT stocks, big or small and from different asset categories, including Prologis (PLD - Free Report) , Alexandria Real Estate Equities Inc. (ARE - Free Report) , The Macerich Company (MAC - Free Report) and Innovative Industrial Properties, Inc. (IIPR - Free Report) , moved higher.
REITs’ dependence on debt for business keeps investors optimistic about their performances in a rate-cut environment as the companies benefit from lower borrowing costs. Moreover, low interest rates contribute to higher valuations. Also, their dividend yield grabs investors’ attention more than yields on fixed-income and money market accounts in times like these.
Specifically, the Fed officials’ median projections for the federal funds rate by the end of December 2024 is 4.6%, down from the 5.1% stated earlier, suggesting the comfort of the Fed officials with the easing of the inflation rate and the economy holding on well. With a full percentage point decline expected in 2025 and another spate of reductions in 2026, the median projection for the federal funds rate by the end of December 2026 is pegged at 2.9%, which is close to the long-run outlook.
The revised outlook also indicates reduced inflation for the current and upcoming years, with the Fed's preferred price index increasing 2.4% in 2024, excluding food and energy.
Moreover, the projections for the U.S. GDP growth rate have been upgraded to 2.6% from the 2.1% stated in September. While the GDP is expected to grow 1.4% in 2024, close to the 1.5% mentioned earlier, the projections for unemployment have been unchanged.
There are pockets of strength amid this scenario, with the REIT industry offering a real-estate structure for several economic activities — real or virtual. Investors should keep a close watch on the REIT stocks to grab solid opportunities in this special hybrid asset class.
Presently, Innovative Industrial Properties carries a Zacks Rank #2 (Buy), while Prologis, Alexandria Real Estate and Macerich carry a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.