The onset of the Federal Reserve’s rate cutting cycle is expected to serve as a major catalyst for REITs, boosting valuations as discount rates fall. Historically, REITs have outperformed during similar economic conditions, and sectors with resilient, long-term cash flows are attractive today. Investors seeking real estate exposure should see this period as a compelling opportunity to benefit from REITs’ liquidity and potential for cap rate compression.

As we move into the next phase of the economic cycle, the Federal Reserve’s (Fed) rate cuts are poised to be a pivotal catalyst for Real Estate Investment Trust (REITs) stocks. Historically, falling interest rates have proven beneficial for REITs, as declining yields reduce discount rates and boost the value of future cash flows. Notably, this dynamic has already been in motion, with REITs beginning their recovery in anticipation of Fed cuts.

Looking back at the 1999-2003 rate cut cycle, REITs outperformed equities significantly during a similar economic landscape, which was characterized by a mild recession and rate cuts. As the Fed continues easing, REITs could once again benefit, especially in sectors like senior housing, wireless towers, and cold storage, where long-term, defensive cash flows offer resilience.

In addition to favorable economic conditions, REIT valuations remain attractive compared to broader equities and private real estate funds. Despite their recent performance, REITs trade at a discount, and the current environment presents an opportunity for investors. As rates decline further, REITs are likely to maintain their first-mover advantage relative to private real estate, benefiting from liquidity and favorable cap rate compression. For those seeking to allocate capital to real estate, REITs offer a compelling entry point, with the potential for continued outperformance during the Fed’s rate cutting cycle.

For more of our thoughts on listed REITs preferences, read our full perspective.

Real estate
Macro views
Disclosure

Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate.

The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.

Securities are offered through Principal Securities, Inc., 800-547-7754, Member SIPC and/or independent broker/dealers.

Principal Asset Management leads global asset management at Principal.®

For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use only in other permitted jurisdictions as defined by local laws and regulations.

© 2024, Principal Financial Services, Inc. Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc.

3892647