Finance  ·  Analysis

REIT Stocks Outperform Private Equity, Real Estate Historically: Report

Center Square Investment Management studied interest rate environments from 1995 to 2018


Maybe the publicly traded REITs are getting a bad rap? 

A new report from Center Square Investment Management, a Philadelphia-based real estate investment firm, found that publicly traded real estate investment trusts (REITs) — at least the ones that aren’t focused primarily on office space — have historically outperformed private real estate and public equities in the aftermath of Federal Reserve interest rate hikes going back 28 years. 

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In fact, considering that REITs are trading at 87 percent their underlying net asset values (NAVs) on the FTSE Nareit All Equity REITs Index, the authors of the report argue that the sector has been severely dismissed by general investors, and emphasized that the negative connotations around office REITs have unfairly penalized the entire sector. 

“At this point, REITs are significantly discounted in the public markets compared to equities and also compared to private real estate,” Uma Moriarity, senior investment strategist at CenterSquare, told Commercial Observer. “When rates are rising, you see public markets discount real estate and therefore REITs. We saw this happening last year, when REITs pretty much performed poorly.”  

Commercial real estate has been hammered by the fastest interest rate hikes in 40 years. Federal Reserve Chairman Jerome Powell has raised the benchmark federal funds rate nine times in 14 months, including four straight increases of 75 basis points from June through November. The central’s bank’s hawkish strategy to combat inflation has brought the federal funds rate from near zero to just over 5 percent in this period. 

The rise in rates has contributed mightily to the current distress in CRE markets. However, the report from Center Square argues that average total returns for publicly traded REITs exceeded those of public equities and private real estate in the early months and first year starting the quarter after the Fed pauses an interest rate increase, from 1995 to 2018. 

“A review of the four rate-hike cycles over the last three decades shows that public REITs outperformed both private real estate and public equities in the 90-day, 180-day, and one-year periods following the end of Fed tightening,” the report said. “These findings make intuitive sense; during times of rising rates, public markets tend to discount rate-sensitive assets such as real estate, and build in an associated risk premium that then creates a true discount and subsequent upside opportunity when the regime changes.” 

The report examined interest rate environments from March 31, 1995, to Dec. 31, 2018, and used public equities data from the S&P 500 (SPX) stock market index, while private real estate data came from the NFI-ODCE, an index of the largest private real estate funds established in 1978. 

One of the primary factors driving a lack of confidence in publicly traded REITs is the market forces surrounding the largest publicly traded office REITs like Vornado Realty Trust (VNO), SL Green (SLG), Brookfield (BN), and Boston Properties (BXP). As office space usage experiences a secular shift following the COVID-19 pandemic, many investors have dumped their positions in these once-powerful stocks. 

Vornado’s stock price has fallen roughly 61 percent from where it was on May 31, 2022; SL Green’s market value is down 62 percent; Brookfield’s dropped 40 percent; Boston Properties fell 56 percent. 

Office REITs only make up 3 percent of the entire space, while other parts of the pie are filled by industrial, residential, health care and data-center REITs, according to Moriarity.  

She also suggested that investors should be a bit bullish on office REITs as a whole, as the private market valuation for the space hasn’t yet been corrected enough to warrant new purchases

“From a tactical perspective, I think office REITs have been beaten down a little bit too much, almost,” she said. “Those able to buy really high-quality, relevant office real estate on the other side of this will still be there and it will be something people go to and utilize.”  

Brian Pascus can be reached at