State Of REITs: Distress Brings Opportunity
Rates Up, REITs Down? Whether fundamentally justified or not, commercial and residential real estate markets continue to bear the brunt of the Federal Reserve's historically swift monetary tightening cycle.
Commercial real estate, in particular, has been the boogeyman that bank executives have blamed for unrelated distress. While there are pockets of distress, actual default rates remain historically low.
The pockets of distress are almost entirely debt-driven, with the notable exception of coastal urban office properties. Nearly every property sector reported "same-store" property-level income above pre-pandemic levels.
Property-level fundamentals are fine, but some balance sheets are not. Many real estate portfolios- particularly private equity funds and non-traded REITs - were not prepared for anything besides a near-zero-rate environment.
With commercial property values now 15-20% below 2022 highs, and with interest rates doubling from last year, the tide is just beginning to recede for many highly-levered portfolios or those lacking access to capital. We're beginning to see some REITs with balance sheet firepower start to get aggressive.
