The top-performing U.S. REIT sector this year even in the wake of recent market volatility. Favorable supply and demand dynamics. And historically low valuations.
KEY TAKEAWAYS
- A falling real rate environment is constructive for Tower REIT performance.
- Towers have favorable supply-demand dynamics amid growing mobile data demand with limited new tower construction.
- Towers are trading well below their average valuation spread to the broader REIT universe.
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Tower REITs lease space to cell phone providers and other telecommunication users. When markets dropped in the wake of the tariff announcement, Towers dropped a modest 3.1% in the four trading days following the announcement. Through March, towers were up 16.4%.
That’s a stark reversal from the prior three years, each of which were negative for towers. And it’s an especially significant departure from the end of 2024 when Tower REITs lost 19.7% in the fourth quarter.
Towers ended 2024 down 14.2% and were the third worst performing among REIT sub-sectors last year. We believe, however, the outlook is favorable from here, building on the first quarter’s performance.
Three trends are driving that favorable outlook on Tower REITs:
First, towers are more sensitive to the interest rate environment than other real estate sectors, so their performance has suffered as the higher for longer rate environment has dragged on.
As this chart shows, from January of 2022 to October of 2023 real rates rose by over 322 basis points, and Tower REITs returned -43% over that time. However, since real rates have peaked in late 2023 and began falling, Tower REITs have returned 23% through March of this year.
EXHIBIT 1
Tower REITs experienced a stark reversal as real rates fell
At March 31, 2024. Source: Bloomberg LP, Cohen & Steers There is no guarantee that any market forecast set forth in this presentation will be realized. The mention of specific sectors is not a recommendation or solicitation for any person to buy, sell or hold any particular security and should not be relied upon as investment advice.
We believe the rate environment will remain supportive of Tower REITs, as the market is currently pricing in at least four rate cuts over the next year.
The second tailwind for Tower REITs: Favorable supply and demand dynamics.
After briefly pulling back on their 5G investments, cellular providers are again in the market for tower space. Users are demanding faster, more data intensive applications like mobile video and gaming.
A recent Ericsson Mobility Report shows estimated global mobile data traffic will double in the next four year. For context, mobile data usage has grown by thirty-one percent annually since 2015.
EXHIBIT 2
Mobile demands are rising, amid limited supply growth
Global mobile data traffic forecast
Exabytes per Month(1)
At December 31, 2024 unless otherwise noted
Source: Ericsson Mobility Report and Cohen & Steers estimates There is no guarantee that any market forecast set forth in this presentation will be realized. The mention of specific sectors is not a recommendation or solicitation for any person to buy, sell or hold any particular security and should not be relied upon as investment advice.
Amid this growing demand, towers face supply constraints from restrictive zoning and public pushback surrounding new tower construction. Local communities across the country from Brawley, California to Sagaponack, New York, have adopted a not in my backyard opposition to new cell tower construction, fighting new construction of towers in their communities.
3. Towers are attractively valued relative to other REITs.
Finally, we are focused on Tower valuations. Since the end of 2019, Tower REITs have, on average, traded at a 1.8x spread to broad REITs as measured by price over funds available for distribution. At year-end last year, Tower REITs’ premium had turned into a 3.3x discount to the broader REIT market.
That’s a historically large discount, as you can see in this chart. And we believe that the current valuation doesn’t reflect the outsized growth opportunity that Towers represents today.
EXHIBIT 3
Tower REITs are near a historic discount to the broader REIT universe
Towers multiple vs REIT index spread
Oct 2019-Dec 2024
At December 31, 2024 unless otherwise noted
Source: Bloomberg LP, Cohen & Steers There is no guarantee that any market forecast set forth in this presentation will be realized. The mention of specific sectors is not a recommendation or solicitation for any person to buy, sell or hold any particular security and should not be relied upon as investment advice.
We believe the rate backdrop, favorable supply-demand tailwinds and attractive relative valuations, create a compelling case for Tower REIT outperformance.
Watch March 2025 The Real Estate Reel: The drivers of listed real estate’s strong start to the year
Watch all The Real Estate Reel videos.
ABOUT THE AUTHORS
Alec Overby, CFA, Vice President, is a real estate securities managing analyst covering the office and regional mall sectors.
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Most defined contribution investors are overlooking real estate, and missing out on its powerful portfolio benefits. Historical data shows that adding a permanent real estate investment trust (REIT) allocation can benefit investors in meaningful ways.
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Data quoted represents past performance, which is no guarantee of future results. The information presented 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. There is no guarantee that any market forecast set forth in this video will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.
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