There are signs of a rebound in real estate stocks – and the new cycle should continue for several years, according to Janus Henderson. For the first time in more than two years, CBRE's U.S. real estate transaction volume appears to have increased, a Nov. 11 report from Janus portfolio managers Greg Kuhl and Danny Greenberger said. They pointed out that CBRE is the largest real estate brokerage in the world and a leader in the corporate real estate sector. Additionally, CBRE reported a 20% increase in US investment sales revenue. This rise in transactions is usually an excellent sign of an inflection point in the cycle, Kuhl said. “The rebound in transactions…highlights multiple avenues for (REITs) to boost earnings growth, enhance expectations for asset values and, ultimately, the potential for higher stock prices and increased earnings in a new cycle,” the report said. The main issue in real estate over the past two years has been valuations, with publicly traded REITs repricing in 2022 at higher rates, Cole said in an interview with CNBC. This year, REITs have started to perform well, even though the yield on 10-year Treasury bonds has remained above 4%. The FTSE NAREIT Equity REITS Index, which tracks US commercial real estate and is the benchmark Janus uses for US real estate ETFs (JRE), has gained about 14% year to date – and has a 3.59% dividend yield to boot. JRE YTD Mountain Janus Henderson US Real Estate ETF “What you're seeing is the market is looking to the future and saying, 'Look, we've started a real estate cycle,'” Kuhl said. “A lot of investors are more confident that the bottom has been kind of hit, and from here, we can focus on the fundamentals, which are good, and that gives you decent growth year over year,” he added. “Then if there is a scenario where interest rates go down a little bit, that's even better, and it will have more upside.” Another factor to take into consideration is that real estate cycles last about seven to ten years, he noted. “If you look at the last few cycles, the first five years of those cycles are great for REITs,” Cole said. “The whole cycle is good, but from a relative performance perspective versus other types of property ownership, the beginning of the cycle is the best time.” Finding an Opportunity Kuhl said the biggest opportunity now in this sector lies in real estate investment trusts for seniors. One reason is that the population is aging because people are living longer. “Demographic growth of more than 80% increases significantly over the rest of the decade,” he said. In addition, there is the problem of supply. Cole explained that the high rate environment of the last couple of years meant that companies were not borrowing money to build new buildings, so there was little growth in supply across properties. Senior housing is a striking example of this. “There's almost nothing being built in the country for those right now,” Cole said. “At the same time, you have huge tailwinds from demand that are very clear and will happen. So, that's a really good story.” In addition, even after planning the buildings, it still takes time to go through the land purchase process and go through all the planning, permitting and construction processes. He said this is a process that takes at least three years. “This means you are nearing the end of the decade before you start seeing supply again in most property types,” he noted. Another good subsector right now is data center REITs, Kuhl said. This is a story of demand, as there is a lot of supply now being built to handle the AI boom. “If you can get access to power and build a data center in most markets in the country, you will lease it,” he said. However, some stocks are already fully valued, so investors should be selective, he added. Cole also sees a few opportunities in industrial properties, offices and shopping centers. For example, office REITs are a small part of Janus' portfolios, but the rout in the space has created some opportunities, he said. “Stocks are down a lot and you can see in some markets that the fundamentals are not getting any worse. So occupancy rates are stabilizing,” Cole said. New York, for example, is the best market “by far,” but the West Coast isn't showing the same signs of recovery, he said. Industrial REITs have also not performed well this year amid sluggish demand and increased supply. He added that supply growth has peaked and is declining as the economy heads into next year. “The question is demand,” Cole said. “If demand stays the same or goes up a little bit, I think the industrial sector will be an interesting story throughout as we move into 2025,” he added. “They are discounted compared to history, and you may see the fundamentals improve as the year goes on.”
Trending
- Most Asian chip stocks rose, shrugging off new US restrictions on semiconductor exports to China
- Jaguar unveils the Type 00 concept car, a first for the controversial brand
- General Motors sells its stake in the battery cell factory to partner LG for $1 billion
- Where Janus Henderson sees opportunity in the recovery of real estate stocks
- Fed Governor Waller is “leaning toward” lowering interest rates, but is concerned about inflation
- Stocks making the biggest moves at midday: SMCI, TSLA, INTC, STLA
- Intel CEO Pat Gelsinger off duty, stock increases 5%
- The United States can “rapidly” adopt cryptocurrency regulation now
Where Janus Henderson sees opportunity in the recovery of real estate stocks
