Over the last couple of years, REITs have been one one of the weakest parts of the market. REITs own and operate income-producing real estate and are obligated to distribute more than 90% of profits to shareholders.

The biggest headwind has been the relentless rise in rates which makes these stocks’ dividend streams less attractive and ups their financing costs. Higher rates also impact demand for housing by making it less attractive. Finally, there is a crisis in the commercial real estate (CRE) space due to low occupancy rates for offices given the increase in remote work.

While there have been an array of macro and cyclical factors negatively affecting REITs, there are some reasons for optimism that the worst may be over. For one, the odds of a soft landing continue to rise. This is due to recent economic and labor market data which clearly show that the job market is cooling, and wage growth is falling. However, job losses have not been materially rising, indicating a period of slower growth rather than a recession.

This should lead longer-term rates to drift lower which would be a catalyst for REIT stocks to start moving higher. Lower rates should help housing demand. Additionally, a weaker job market could also give employers more leverage to force workers to return to the office. 

Overall, many of the negative trends which were impacting REITs are now reversing.

Finsum: Recent economic data is strengthening the odds of a soft landing. Here are why REITs would be a big winner in this scenario.