REIT REBOUND AS RATE-HIKE CYCLE ENDS
The recent rise in interest rates has created a sentiment headwind for the REIT market. However, given the market’s underperformance since early 2022 and its discounted valuations, we believe that the market has already priced in that incremental risk. REIT fundamentals are expected to remain resilient for most property types given long lease durations, low supply risk, and defensive- and secular-based demand.
Historically after Fed tightening cycles ended, REITs outperformed the broader U.S. equity market on a 12-month-forward basis. We expect to see REITs rebound as we approach the end of the current Fed’s tightening policy. Given moderating inflation and a resilient labor force, the current market environment should bode well for REITs’ relative performance.
FOCUS ON DEFENSIVE DEMAND SECTORS
We continue to favor strong rent growth and needs-based facilities that are less sensitive to economic headwinds, e.g., assisted living and affordable housing. Data centers are also a key area of focus given their attractive valuation and upside potential from the growing demand for artificial intelligence (AI). We believe that the demand will continue to accelerate even if economic growth moderates.
The views expressed herein are those of PGIM Real Estate investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. This commentary is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. This commentary does not constitute investment advice and should not be used as the basis for any investment decision. This commentary does not purport to provide any legal, tax, or accounting advice.
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