REITs React Differently to Rate Cuts: Mortgage REITs Lag, Life Sciences Lead
Pacifica Yield has identified mortgage Real Estate Investment Trusts (REITs) with broad floating rate portfolios and fixed borrowing costs, as well as those exposed to short-term economic volatility like lodging and multifamily, as reacting the slowest to rate cuts. Conversely, REITs, particularly life sciences and healthcare, are expected to drive the most alpha in a rate-cutting environment, with Alexandria Real Estate Equities (ARE) highlighted as a compelling opportunity.
A Seeking Alpha readers poll supports this, with mortgage lender stocks (26.4%) and homebuilder stocks/ETFs (24.6%) expected to react quickest to declining interest rates. Residential real estate, especially in prime locations, and commercial properties with stable rental income, typically react most quickly due to rapid demand and investor interest. However, office properties and projects requiring extensive planning or conversion react more slowly, as their economic viability depends on complex factors and longer timeframes.
Dr. Christopher Davis agrees, believing REITs, especially specialized spaces like data centers and healthcare, will benefit significantly from substantial mortgage interest rates cuts. He suggests that REITs more exposed to business cycles or their tenants' cycles, such as hotel and lodging REITs, will have a more muted reaction, with a delayed impact for those with long leases locked in. Mortgage REITer's Digest notes that equity REITs react slowly due to their fundamentals moving slowly, requiring a more significant change to the federal funds rate for an impact. It highlights mortgage REITs and mortgage funds, along with homebuilders, as quickly reacting to mortgage rates cuts due to their portfolio dynamics and reliance on mortgage availability.
In summary, while mortgage REITs with floating rate portfolios and fixed borrowing costs react slowly to rate cuts, life sciences and healthcare REITs are expected to drive the most alpha. Mortgage lender stocks and homebuilder stocks/ETFs are anticipated to react quickly, along with residential real estate and commercial properties with stable rental income. However, office properties and projects requiring extensive planning or conversion react more slowly. REITs exposed to business cycles or their tenants' cycles may have a muted reaction, with a delayed impact for those with long leases locked in. Equity REITs react slowly due to their fundamentals moving slowly, requiring a more significant change to the federal funds rate for an impact.
