The commercial real estate market suffered significant setbacks at the hands of the coronavirus pandemic. This hampered shares of the related listed real estate investment trusts (REITs). However, some market observers believe commercial real estate can awaken from its lengthy slumber in 2025.
Should that outlook prove accurate, investors may want to consider the virtues of active management when accessing the potential resurgence. The ALPS Active REIT ETF (REIT) is one of the exchange traded funds that answers that call. REIT could leverage active management to unearth opportunities in the commercial real estate market. This is particularly true if the U.S. economy remains on solid ground.
“Economic conditions support, and the Federal Reserve appears to be poised to successfully engineer, another soft landing for the U.S. economy. This is good news for the broad CRE market,” according to a recent report by Nareit.
Other Keys for REIT Rally
Economic vibrancy and accommodative monetary policy are often catalysts for real estate stocks. That could prove true again in 2025. Still, when it comes to the CRE space, there are other factors to consider. Those include publicly traded REITs closing the valuation gap with their private peers and transaction volume increasing.
“Monetary policy easing and declining interest rates are expected to play critical roles in closing the public-private cap rate gap. Increasing closure would likely continue to fuel REIT outperformance into 2025,” added Nareit. “As public and private real estate values become more in sync, Nareit expects the broad CRE transaction marketplace to regain its footing and become active once again.”
The research firm acknowledged there are risks to the CRE rebound thesis, including elevated 10-year Treasury yields and the possibility of the Trump Administration deploying trade tariffs against Canada and Mexico. Assuming those become lingering issues, REIT could be an ideal play for income investors because it manage CRE and interest rate exposure more nimbly than passive rivals.
Speaking of active management, data indicate that managers of funds like REIT are diversifying toward other real estate segments to buffer against potential disappointment in the CRE space.
“Dedicated REIT managers have increasingly been targeting modern economy sectors in their investment strategies. In the third quarter of 2024, data from Nareit’s actively managed real estate fund tracker showed that modern economy sectors with the largest changes in their active weights included data centers, telecommunications, health care, and self storage. Fundamentals across these sectors appear to be more robust than those of the four traditional property types,” concluded the research firm.
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