Real Estate Stocks: A Mixed Bag in 2025
The real estate sector has faced significant challenges since the Federal Reserve started raising interest rates in 2022. Despite a brief rebound in 2024, the outlook for 2025 is uncertain. However, this doesn’t mean investors should expect a uniform decline in real estate shares. Instead, it’s likely to be a stock-picker’s market, where some companies thrive while others struggle.
Office REITs: A Bright Spot
One area that’s generating optimism is office real estate investment trusts (REITs). These companies have been hit hard since 2022, with the S&P Composite 1500 Office REITs Index plummeting over 30%. However, their cost and availability of capital make them competitive, particularly when it comes to trophy assets in prime markets. Office REITs have already started to rebound, posting a total return of over 28% in 2024. Companies like SL Green Realty Corp., Vornado Realty Trust, and Highwoods Properties Inc. have seen significant year-to-date gains.
Residential Real Estate: Challenges Ahead
In contrast, the residential market is expected to face challenges in 2025. High mortgage rates and limited supply are likely to impact the sector, particularly after Fed Chair Jerome Powell’s comments indicating fewer rate cuts are coming. Homebuilders, who benefited from elevated mortgage rates, are now cooling off. The US central bank’s intention to go slower on rate cuts will likely keep mortgage rates higher than anticipated, leading to dwindling supply as homeowners become reluctant to move.
Luxury Real Estate: A Warning Sign
Even ultra-luxury homes, which seemed impervious to outside forces, may be hitting a wall. Cole Smead, CEO of Smead Capital Management, expects luxury homebuilder stocks to reflect the performance of the broader stock market, which he’s bearish on for 2025. The all-cash deals that have kept the market thriving are at risk of higher borrowing costs, which could lead to a downturn in the luxury home market.
A Stock-Picker’s Approach
As investors consider how to play the real estate market heading into 2025, it’s essential to take a stock-picker’s approach. Data center REITs, real estate services companies, and senior housing REITs are areas that offer opportunities. Adam White, senior equity analyst at Truist Advisory Services, warns against simply buying a sector fund, urging investors to be more selective in their investments.
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