REIT Stocks Didn’t Nosedive This Month — Why Not?

Real estate investment trusts (REITs) proved to be as good as gold, or perhaps better, in the stock market’s recent period of instability.

Where many investors found even safe-haven commodities like gold to be extremely volatile as President Donald Trump’s tariff war with the world played out dramatically in the first days of April, many REITs ended up holding steady, keeping shareholder value well above water. 

(Although that depends on the sector and the REIT. Read on.)

Trump’s “Liberation Day” on April 2 brought reciprocal tariffs on nearly every country and territory, which in turn brought about the biggest market crash since the beginning of the COVID-19 pandemic in 2020. The S&P 500 index dropped over 9 percent in the first week of April alone and the Nasdaq Composite dropped over 22 percent from its most recent record close over the same period.

Trump’s 10 percent tariffs across the board became the most extreme import tax since those initiated by then-Congressman William McKinley in the 1890s, a 50 percent increase on existing tariffs that raised duties as much as 49.5 percent, according to the University of Birmingham. Most historians and economists say it was a contributing factor to the Panic of 1893.

The 1930 Smoot-Hawley Tariff Act  — Anyone? Anyone? — was also designed to protect American industries, especially farmers, but is widely regarded to have only worsened the Great Depression.

However, because of tight regulations around their transactions, REITs are slower to buy and sell properties and are less likely to be developing buildings from the ground up. In other words, REITs’ business model is less exposed to construction cost increases from tariffs, according to John Worth, executive vice president of research and investor outreach for NAREIT, a global trade group for REITs.

“REITs have bounced around with the broader market, but they continue to be something of a safe haven,” Worth said. “As of the close Friday [April 11], REITs were still outperforming the S&P 500 by about 350 basis points at 3.5 percentage points or so. Because they are companies that own U.S. properties, by and large they’re going to reflect broader trends in the economy. They’re not going to be as immediately related to trade-based volatility as other sectors.”

Some of the biggest REITs in the nation, if not the world, have even managed to gain some clout among investors as other stocks nosedived. Though these same REITs were not necessarily spared the volatility entirely. 

SL Green Realty, a REIT that’s New York City’s largest office owner, saw an 8 percent drop in its share price. The share price of Empire State Realty Trust, another major New York owner, declined 12.4 percent starting March 17.

Retail-focused REITs such as Simon Property Group have seen stock prices slip almost 9 percent since March 17, while office and retail owner Brookfield’s price per share was even less reactive to the Liberation Day tariffs, with only a 3.5 percent dip over the same period.

It was a resilience shared across the office REIT sector. Paramount stock fell 15 percent year-to-date — but gained almost 4 percent since March 17 — and was downgraded on April 15 by Morgan Stanley, which called the office market “one of the worst performing subsectors YTD” among REITs with the expectation that the number of job openings will decline.

Credit-focused REIT Apollo Commercial Real Estate Finance dropped almost 18 percent since March 17, and Ares Capital went down by about 5.5 percent.

Health care REIT Welltower probably saw the most resilience with a 1 percent price dip since March 17.

In fact, the insular nature of stock prices for REITs has been a defining feature of the organizational model since federal lawmakers authorized them in 1960. Institutional investors and financial advisers recommend REITs as a way to diversify portfolios, according to Worth.

Essentially, they’re performing the way they are supposed to be performing.

“REITs on the whole do not do a ton of development. … If they’re doing development, it’s a relatively small part of their portfolio. Their returns are mostly driven by rental income,” Worth explained. “REITs are really buy-and-hold institutions. In fact, there are REIT and tax code rules that actually forbid REITs from essentially flipping properties. They really have to maintain stable portfolios.”

It’s true not all REITs are performing equally. Since the beginning of April — and essentially since Trump’s actions manifested into a full-blown market selloff in which close to $3 trillion was taken out of the New York Stock Exchange and international markets — companies with strong investment in data centers and cellphone towers were performing the best.

“If you think about cellphone towers, very little of that is going to be driven by trade,” Worth said. “Their outlook is really going to be driven by how much leasing space do mobile carriers need. … Data centers are being driven by the increasing digitization of our economy. So those are two of the better performing sectors since April 1.”

Just days into Trump’s second term, the outlook for REITs was strong, with technology research and advisory company Technavio predicting about $350.2 billion in growth within the REIT sector between 2024 and 2028, thanks to global demand for warehousing and data storage facilities. 

About 49 percent of that global growth was expected to take place in North America alone, according to the Feb. 7 market report.

Whether that progress is still possible is less clear, but Jonathan Morris, an adjunct professor of REITs at Georgetown University, doesn’t see the stock market stabilizing until the Trump administration’s policies become more consistent rather than changing day to day or week to week.

REITs serving the hospitality industry will be hardest hit by tariffs, especially as foreign governments and businesses warn their people that coming to the U.S. poses a risk to their privacy and possibly their safety.

For example, Canada’s largest pediatric research hospital, Children’s Hospital of Eastern Ontario (CHEO), is telling its employees to pack a burner phone in case their electronics are confiscated in customs, Bloomberg reported Monday.

Companies like Alberta Investment Management Corporation have also told employees to forgo travel to the U.S. on company business, while the University of Waterloo issued an advisory similar to CHEO’s to its associates.

“This is not some small company telling their three employees not to go. These are major organizations in Canada, and if they’re saying it, everybody else is saying it,” Morris said. 

Retail will have a tough time with much of the products for the apparel industry coming in from China and other East Asian countries. That could impact industrial real estate as well, with much of the recent investment being near or on the route to and from ports since e-commerce blew up following the pandemic.

“China is a big bogey out there because China has yet to respond to anything the administration or Trump has said, and the administration I think is getting worried that they’re just not going to have any conversations,” Morris said April 15. “In terms of real estate, I don’t think it’s going to have a macro impact across all sectors more than the other sectors. There will be some adjustments in pricing and valuations.”

This hasn’t been for lack of provocation, after the Trump administration ordered a 125 percent tariff on China as of April 12 and the Red Dragon saying it plans to simply ignore any additional levies against its imports while also canceling a big order of Boeing jets.

While tourism, retail and industrial are likely to suffer most, REITs are not there yet, and other sectors exist that are insulated from the fallout of the tariff war, according to Morris.

“Apartments are continuing to be strong and cap rates of high-quality products are still in the five to low fives, and there are plenty of buyers out there for that product,” Morris said. “Industrial, it’s still strong. … Lodging is a different animal.”

David Auerbach from advisory Hoya Capital Real Estate believes the burden of tariff distress will mostly be carried by retail and hospitality tenants of REIT landlords, and the temporary stock market distress won’t do enough alone to injure them.

Even investors who buy REIT stocks are likely to shrug off any marketwide selloffs because such investors are looking for gains from dividends rather than from selling shares, according to Auerbach.

More trade-dependent sectors such as timber, farmland, industrial, malls and shopping centers could have challenges, while storage, apartments, single-family rental and manufactured homes are likely to be the least exposed sectors, according to Auerbach.

“We’re coming up on earnings season right now, and one thing I think we’re going to start hearing from these guys is that there’s just too much uncertainty,” Auerbach said. “When you look at REITs, you have to use 10- to 25-year glasses as you look at the sector because you buy REITs for the income stream that the dividends provide investors. I know it’s different this quarter versus last quarter, but, when you look at what happened in the first quarter, I think it was like 36 REITs raised their dividends in the beginning of the year.”

REIT executives, Auerbach said, are extremely unlikely to make any knee-jerk reactions unless distress carries on for the extent that their investment strategy is expected to play out.

“So, now, the real question is how many REITs will continue to raise dividends throughout this year,” he said, “or will we continue to see REIT dividend cuts because of this action.” 

Mark Hallum can be reached at mhallum@commericalobserver.com.