Late last year, we wrote a report arguing why we see favorable entry points emerging for listed REITs. Recent market developments give us further conviction in this view.

Three key factors underscore our prior analysis, which we review and update below.

First, we continue to believe that commercial real estate fundamentals are on strong footing. Consider that listed REITs generated same-store net operating income (NOI) growth of 7.2% in 1Q23, compared with the historical average since 2000 of 2.4%. Fourth-quarter rolling NOI growth stood at 7.4%, compared with an average of 2.7% (since 1983), according to NCREIF.

Listed REIT fundamentals are decelerating but will remain resilient. In fact, we have lowered our growth expectations amid the slowing economic backdrop (Exhibit 1). But REITs have entered the economic slowdown in relatively healthy positions due to favorable supply-demand dynamics amid tight supply. Listed REIT earnings have historically been stable, particularly compared with equities, due to their in-place leases, limited supply and high operating margins.

Global REITs(a) cash flow growth estimates (%)

Data quoted represents past performance, which is no guarantee of future results. The information presented above does not represent the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance listed above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. (a) Global REITs represented by the FTSE EPRA Nareit Developed Real Estate Index. (b) Funds from operations (FFO) is the REIT industry’s key earnings metric. It is calculated as GAAP net income, plus real estate gains (minus real estate losses), plus GAAP real estate depreciation and amortization. FFO growth is based on data from Cohen & Steers. Cohen & Steers data excludes FFO growth outliers of +/-100% and is based on the constituents of the FTSE EPRA Nareit Developed Real Estate Index. See end notes for index associations, definitions and additional disclosures.

Second, we believe that recessions create strong entry points for listed REITs. We have seen historical returns in recessionary periods (on a next-12-month basis) of greater than 10% for U.S. and more than 14% for European listed REITs (Exhibit 2). However, the best entry points for REITs have come early cycle, when next-12-month returns have historically been around 20% for both U.S. and European REITs. By comparison, U.S. listed REITs have declined 0.2% and European listed REITs have returned 7.2% on a next-12-month basis after late cycle periods, leading into recessions.

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Average 12-month forward total returns based on U.S. conference board indicator(a)
January 2000–December 2022

Average 12-month forward total returns based on Euro Area business cycle indicator(e)

January 2000–December 2022

At December 31, 2022. Source: Thomson Reuters Datastream, Cohen & Steers, and Bloomberg.
Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. Index comparisons have limitations as volatility and other characteristics may differ from a particular investment. Analysis based on European business cycles as determined by the Euro Area Business Cycle Network.
(a) The Composite Index of Coincident Indicators is an index published by the Conference Board that is a broad-based measurement of current economic conditions, helping economists and investors to determine which phase of the business cycle the economy is currently experiencing. Months from January 1991-December 2020 have been categorized as early, mid, late cycle, or recession. Above returns show the average annualized return during these periods.
(b) U.S. REITs represented by the FTSE Nareit Equity REITs Index which contains all tax-qualified REITs except timber and infrastructure REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. (c) U.S. Equities represented by the S&P 500 Index which is an unmanaged index of 500 large-capitalization stocks that is frequently used as a general measure of U.S. stock market performance. (d) U.S. Private Real Estate is represented by NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE). (e) The Euro Area Business Cycle Network (EABCN) provides a forum for the better understanding of the Euro area business cycle, linking academic researchers and researchers in central banks and other policy institutions involved in the empirical analysis of the Euro area business cycle. The EABCN organizes training schools and conferences for central bank researchers and incorporates the CEPR-EABCN Euro Area Business Cycle Dating Committee (EABCDC) which dates turning points in the business cycle in the euro area. The (EABCDC) was founded in 2003 by CEPR under the initiative of Lucrezia Reichlin to establish the chronology of recessions and expansions of the eleven-original euro-area member countries plus Greece for 1970-1998, and of the entire euro area from 1999 onwards. Months from January 2000-December 2022 have been categorized as early, mid, late cycle, or recession. Above returns show the average annualized return during these periods. (f) European listed REITs represented by the FTSE EPRA Nareit Developed Europe Index. (g) European Equities represented by the STOXX Europe 600 Index which is an unmanaged index of 600 components representing large, mid and small companies among 17 European countries. (h) European Private Real Estate is represented by InREV Total Returns Index. See end notes for index associations, definitions and additional disclosures.

Third, we believe that we are transitioning from a stagflationary environment to a stagnationary environment, which has historically been more accommodative for REITs. With inflation backing off, we believe the Federal Reserve will stop hiking interest rates sooner rather than later. Inflation is higher and more persistent in Europe and many other global markets, but the Fed is typically a leading indicator for central bank actions in international markets.

And the end of a rate-hike cycle is typically a very good environment for listed REITs. In fact, U.S. listed REITs have historically produced returns above 15% over the six months following the end of a Fed hiking cycle (Exhibit 3). That’s also important for global listed REITs, not only because the U.S. is typically a leading indicator for international markets, but also because U.S. REITs compose nearly two-thirds of global REIT assets under management.

Average returns during hiking period cycles(a)

At March 31, 2023. Source: Cohen & Steers calculations, Bloomberg, and Federal Reserve.

Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin.
(a) Returns represent average of hiking period cycles covering February 1994–March 1995, July 1999–June 2000, July 2004–August 2006, and December 2016–February 2019. (b) U.S. REITs are represented by the FTSE Nareit All Equity REITs Index. Returns shown are average non annualized total returns. (c) U.S. equities are represented by the S&P 500 Index. Returns shown are average non annualized total returns. See end notes for index associations, definitions and additional disclosures.

There are additional market developments that we believe are important to understand.

First and foremost, we have long argued that listed REITs are a leading indicator for the private market. Recent market activity supports this view: We have seen the spread between listed and private real estate returns, both in the U.S. (Exhibit 4A) and in Europe (Exhibit 4B), narrowing from the significant divergence the two asset classes had in 2022.

At March 31, 2023. Source: Bloomberg, NAREIT, NCREIF and Cohen & Steers.

At March 31, 2023. Source: Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. There is no guarantee that any market forecast set forth in this presentation will be realized.
(a) U.S. REITs represented by the FTSE Nareit Equity REITs Index (b) U.S. Private Real Estate is represented by NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE). (c) European listed REITs represented by the FTSE EPRA Nareit Developed Europe Index. (d) European Private Real Estate is represented by InREV Total Returns Index. See end notes for index associations, definitions and additional disclosures.

In the U.S., listed REITs were up for each of the last two quarters (4Q22 and 1Q23), while the NCREIF ODCE index, a widely followed index of open-ended funds that own core assets, was down over the same periods.

Indeed, over the two quarters, U.S. REITs outperformed the ODCE index by more than 10 percentage points. This is especially noteworthy because private U.S. CRE valuations have declined for two consecutive quarters (or more) only twice before—in 4Q90–4Q92 and in 3Q08–4Q09. We see this occurrence as a contrarian “buy” signal for REITs. And if listed REITs lead private valuations on the way down, we expect them to do so on the way up as well.

It’s not just the timing of the ODCE index decline that’s significant; it’s also the magnitude. The 4Q22 return of around –5% was the fifth-greatest quarterly decline since 1978. The return in 1Q23 of around –3% was the eighth-greatest decline since 1978 (Exhibit 5).

Top private real estate quarterly declines since 1978(a)

At March 31, 2023. Source: NCREIF, Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results. The information presented above does not represent the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance listed above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. There is no guarantee that any market forecast set forth in this presentation will be realized.
(a) Private real estate quarterly declines vs. listed real estate forward 12-month returns. (b) Private real estate represented by the NCREIF Fund Index – Open End Diversified Core Equity. (c) Listed real estate represented by the FTSE Nareit All Equity REITs Index. See end notes for index associations, definitions and additional disclosures.

Our analysis of the previous 10 largest declines in the NCREIF ODCE index shows that U.S. listed REITs have never been down on a next-12-month basis after those drops; they’ve been up anywhere from 15% to more than 100%. We don’t believe it is reasonable to expect returns in the higher end of this range, but we do believe this is a strong market signal that we may be at an attractive entry point for REITs.

We see a somewhat similar dynamic playing out in Europe, where the INREV index (from the European Association for Investors in Non-Listed Real Estate Vehicles) has posted negative total returns for three consecutive quarters (–1.3% in 3Q22, –6.2% in 4Q22 and –1.0% in 1Q23). These were the first negative quarterly returns for European private real estate since a small decline during the height of the pandemic (–0.6% in 4Q20) (Exhibit 6).

INREV Index total Return

At March 31, 2023. Source: INREV, Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results. The information presented above does not represent the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance listed above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. There is no guarantee that any market forecast set forth in this presentation will be realize.

By comparison, European listed REITs, as measured by the FTSE EPRA Nareit Developed Europe Index, are potentially showing signs of bottoming. After dropping significantly to start 2022 (–7.2% in 1Q, –28.2% in 2Q and –21.6% in 3Q), European REITs rebounded in 4Q of last year, returning 14.4% before then dropping moderately in 1Q of this year (–2.9%).

Following this period of repricing, we believe listed REIT valuations look attractive relative to history (Exhibit 7), and discounted valuations have historically marked favorable entry points. In particular, we believe European listed REITs, which have lagged their U.S. peers in recent performance, offer attractive upside potential, while we see opportunities in Asia Pacific from reopenings and China’s supportive monetary policy stance.

Premium/discount to NAV by region(a)

At April 30, 2023. Source: Cohen & Steers estimates based on proprietary qualitative and quantitative metrics.
Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin.
(a) NAV (net asset value) seeks to calculate the net market value of all of a company’s assets after subtracting liabilities. (b) 5-year historical range was calculated using Cohen & Steers’ valuation metrics and is based on the FTSE EPRA Nareit Developed Real Estate Index (net) at the end of each month. (c) Current numbers were calculated using Cohen & Steers’ valuation metrics and are based on securities that are in Cohen & Steers’ coverage universe, which represents a 97% overlap with securities included in the FTSE EPRA Nareit Developed Real Estate Index. Certain companies in sectors such as infrastructure are covered by Cohen & Steers but are not in the FTSE EPRA Nareit Developed Real Estate Index (net). (d) Represents the weighted average of all REIT regions. See end notes for index associations, definitions and additional disclosures.

Yet investors might be wondering: If this is such an attractive environment, why are listed REITs underperforming the S&P 500 so far this year? For one, we believe the recent banking headlines have created concerns that are weighing on listed REITs.

In particular, there is now increased focus on tightening lending conditions, especially in the office sector. However, contrary to common misconception, office exposure within listed REITs is less than 3.5% of the index’s market cap.

Further, there is a view that commercial real estate is a highly levered asset class. In the case of REITs, this simply isn’t true. On average, REITs have leverage less than 35%, and 86% of their debt is fixed (for an average term of around six years).

These attributes, which appear not to be well understood among the general investor population, may help insulate listed REITs against looming market pressures as growth slows and lending conditions tighten.

Finally, we challenge the comparison with the S&P 500 for one primary reason: The S&P 500 is no longer a diversified index. The majority of YTD gains in the index have been driven by a small subset of stocks; in contrast, the U.S. listed REIT universe comprises 18 different subsectors and is therefore much more diverse, with different characteristics and market dynamics. As of the end of May, the MSCI US REIT Index was just -0.5% below the equal-weighted S&P 500 index, with several subsectors producing meaningfully higher returns, including single-family rentals, data centers, and industrial.

We don’t claim to be market timers. But when uncertainty abounds in markets, as it does today, we believe that often indicates an environment in which strong returns can be generated over the medium term.

Given continued healthy listed REIT fundamentals and our view of the signals that the private CRE market is now sending, we do believe historical precedent points to the possibility of a strong rebound for the asset class— lending further conviction to our assessment that 2023 may be a favorable entry point.