Real estate stocks and related ETFs recently regained lost momentum. The ALPS Active REIT ETF (REIT) certainly merits a place in that conversation.
Confirming that the combination of active management and real estate investing can be a winner for investors, REIT gained 6.15% for the month ending Sept. 12. Indeed, some of REIT’s recent bullishness is undoubtedly attributable to expectations that the Federal Reserve will lower interest rates, perhaps by as much as 150 basis points into early 2025.
However, there’s more to the story. That includes some signs of improvement in the commercial real estate (CRE) space. That area had long been a drag on the sector at large. The CRE industry remains one of the more challenged real estate subgroups. But REIT could be a solid idea for investors looking to contend with CRE’s risk/reward profile.
Currently, the fund’s exposure to office REITs isn’t excessive, but as an active fund, that allocation can be adjusted as relevant opportunities emerge. Plus, REIT is levered to positive trends in other corners of the real estate sector.
Changing CRE Perspective Could Lift REIT
REIT’s allocation of 25.68% to specialized real estate investment trusts, which includes CRE names, isn’t massive. But it’s enough so that the fund can benefit from or be somewhat vulnerable to goings-on in that corner of the property market.
That explains why REIT and its peers stumbled amid distress in the regional banking market last year. But some experts argue the worst is behind the CRE sector. And that could potentially signal opportunity with ETFs such as REIT.
“Even though the fundamental deterioration in terms of the level of delinquencies and losses may be ahead, the rate of change seems to have clearly turned. In that sense, as long as the rate cuts that we anticipate materialize, the worst of the CRE issues for regional banks may now be behind us,” noted Vishy Tirupattur, Morgan Stanley’s chief fixed income strategist.
Tirupattur added that over the past year, 76% of the CRE loans that matured were paid off, which is a decent rate. It was, however, eclipsed by the payoff rates among hotel, industrial, and multifamily property borrowers. And that’s relevant to investors considering REIT. That’s because the ETF allocates about 30% of its weight to that trio of real estate groups. With some help from office REITs, real estate ETFs such as REIT could add to recent gains.
“In short, the secular headwinds facing the office market have not dissipated. Office property valuations, leasing arrangements and financing structures must adjust to the post-pandemic realities of office work. While this shift has begun, more is needed,” concludes the Morgan Stanley strategist.
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