Friday, 31 March 2023 06:03

REITs Struggling Amid Higher Rates, Slowing Economy

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While the entire real estate market is struggling amid a backdrop of rising rates, stubbornly high inflation, and a banking crisis, there is no area feeling more pain than commercial real estate (CRE). This segment never fully recovered from the pandemic as many businesses and employees seem to have permanently adopted a remote or hybrid work scheme. 

Thus, commercial real estate was already struggling before the past year when these pains intensified due to a slowing economy and a hawkish Fed. However, some Wall Street analysts are seeing a contrarian opportunity in the sector despite these headwinds according to an article by Phillip van Doorn of Marketwatch.

Overall, the analyst community remains negative on the sector especially among office buildings. According to Adam Posen, President of the Peteron Institute for International Economics, office occupancy remains 30 to 40% lower than from before the pandemic. Many REITs with exposure to office buildings have already endured severe corrections. 

Another risk is the potential of spillover pain into the financial system given that there is about $400 billion of annual CRE loan maturities. Current models estimate losses in the range of 1 to 3%. 

Despite these headwinds, analysts see opportunities in the REITs with top-quartile properties and successful management teams.    


Finsum: The weakest part of the real estate market is commercial real estate. It was already struggling due to the increase in remote and hybrid work, but these pains have been compounded by rising rates and a slowing economy. 


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