“It’s the economy, stupid,” is a maxim of long-standing in the political world. It’s also front of mind for many investors in real estate investment trusts (REITs), as evidenced by the dramatic upswings of many stocks in the sector on Tuesday. There was some highly encouraging news about inflation, and the market reacted accordingly and strongly.
Many REITs booked notable gains on the day, no matter what niche or niches they specialize in. Realty Income (O 4.49%) closed nearly 5% higher in price, while American Tower (AMT 5.76%) and Sun Communities (SUI 5.82%) both rose by nearly 6%. Stag Industrial (STAG 4.60%) and W.P. Carey (WPC 3.26%) moved higher by 4.6% and 3.3%, respectively.
Inflation came in lower than expected
There was little consequential news from any of those five REITs (or any prominent company in the sector, come to think of it). Rather, the bullishness was due to the latest inflation data from the federal government‘s Labor Department.
It revealed that consumer prices were more or less flat in October month over month, while the year-over-year rise from the previous October, 3.2%, was lower than the 3.7% of September.
Drilling down a bit, core inflation (which strips out relatively volatile food and energy prices) moved up by 2.8% year over year. That was well down from the 5.1% we experienced in the first five months of this year.
The October figures were lower than the consensus estimates from economists.
All of this increases the chances that the Federal Reserve will not raise interest rates, at least in the proximate future. It has been an aggressive raiser over the past few years, spurred by a desire to dampen the inflation that has plagued the U.S. economy since the pandemic.
A pause in interest rate increases (or even, eventually, perhaps a reversal) is a clear benefit to any business in or adjacent to real estate. Investing in property is expensive, which is why real estate in general and REITs in particular rely so heavily on debt financing.
With rates turning steady ahead — or, again, even potentially declining — they won’t have to pay more for the credit they need to build, acquire, or maintain properties.
A broad rally throughout the REIT sector
That’s why Tuesday’s REIT rally was indiscriminate, benefiting operators that concentrate on retail properties (Realty Income), warehouses (Stag Industrial), communications infrastructure (American Tower), or basically any other niche in the sector.
Is the surge likely to continue? I would imagine not, as news items tend to provide very short-term pops to stock prices. Yet the inflation figures made for very positive and encouraging news that brightens the outlook for nearly every title in the REIT sector. Now is a good time to be invested there.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Tower, Realty Income, Stag Industrial, and Sun Communities. The Motley Fool recommends W. P. Carey. The Motley Fool has a disclosure policy.