Rate-Cut Hopes Trigger Rally for Left Behind Real Estate Stocks

Even some of the most out-of-favor US stocks are being swept up in the latest rally, with the surprisingly cool inflation report rekindling speculation that rate cuts are coming this year.

Real estate stocks — dragged down as the higher-for-longer monetary policy storyline took hold — are still the S&P 500 Index’s only losers this year, down nearly 4% against the benchmark’s 14% gain. But as traders reload easing bets, the sector was the second biggest gainer during Wednesday’s rally with a 1.7% advance, trailing only technology stocks.

The movement reflects the real estate industry’s heavy sensitivity to interest rates, particularly for highly leveraged companies that plow borrowed money into offices, shopping malls, health-care facilities and other projects like cell-phone towers. 

“We would expect listed REITs to outperform in such an environment as returns have become highly directionally correlated over the near term to changes in real rates,” said Rich Hill, senior vice president and head of real estate strategy and research at Cohen & Steers Capital Management. 

Hudson Pacific Properties Inc., the biggest year-to-date laggard among office REITs, surged as much as 18% Wednesday, its largest jump in nearly a year, before paring most of the advance.

The Wednesday rally is in line with recent trends. Real estate is among the sectors that typically outperforms on softer-than-expected consumer price inflation release days, according to data from LPL Financial and Bloomberg. 

The day’s advance has echoes of sector’s rally in late 2023, when traders pushed up real estate stocks, betting that rate cuts were imminent. That reversed after stickier-than-expected inflation earlier this year kept the Fed on hold. Investors are waiting for clues on the timing of its first cut after the policy-setting meeting Wednesday.

“Clearly the prospect of lower rates is driving the rally, fueled by the possibility of higher asset values , lower interest payments, and an easier time refinancing,” said Bloomberg Intelligence analyst Jeffrey Langbaum. 

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