Fears about the health of the U.S. economy punished markets on Monday and real estate stocks along with it, as the threat of recession drove a brutal sell-off.
The S&P 500 slipped 3 percent, its biggest one-day drop since September 2022. The Dow Jones Equity All REIT Index, which measures performance across all classes of real estate, matched that decline.
Friday’s jobs report showed hiring in July slowed by more than expected, stoking concerns that the Federal Reserve’s reluctance to cut rates could plunge the U.S economy into a recession.
Ironically, real estate has been waiting for the Fed to see a reason to cut rates, and the rise in unemployment could be that push.
But if the economy seizes before rates come down, the recession could prove a worse blow to property performance.
If residential tenants and businesses pull back on spending, commercial real estate will draw less demand, hurting revenues and driving down values that have already suffered from the rise in interest rates. A recession could also lead lenders to pull back more than they already have, making the cost of financing more expensive.
Most REITs have fared poorly compared to the broader market over the past year, amid those value declines and higher borrowing costs. The All REIT Index as of late June had logged an annual return of 5.7 percent, compared to the S&P 500’s 24.6 percent, according to a recent report by S&P Global.
But indices tracking industrial, hotel and office real estate investment trusts have taken the worst of it. All of them posted negative returns in the second quarter, according to S&P Global.
Office REITs continue to suffer from their holdings’ rising vacancies and falling revenues. A recession would likely exacerbate that distress.
Los-Angeles office landlord Hudson Pacific Properties, which reported a $52 million loss in the first quarter, posted a negative return of 24.7 percent in the second. It clocked in as the third worst performing REIT in the period, according to S&P.
Shares of Hudson Pacific dropped 4.8 percent Monday.
New York’s office landlords also weathered larger declines compared to REITs on the whole. Vornado Realty Trust fell 4.2 percent; SL Green Realty slipped 5.6 percent.
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