The below graph shows 10 year treasury yield, compared with VNQ (Vanguard REIT Index), while the yield peaked on October and have come down, yet VNQ is going down. For those whoa re new to REIT, the REIT valuation is based on cap-rate and cap-rate is influenced by interest rates.
May be it is time to start looking at historical cap-rates vs interest rates vs current price.
Now, I think we have seen the peak of rate hike, and I am sure FED has broken something, whether it is inflation, banking (specifically regional banking) or economy or may be all of them. No matter what given the regional banking troubles, banks are going to reduce lending and that is going to flow into the economy and slow it down. Where I am going with all this is, the rates are going to go down!!
When that will result in FED cutting the rates needs to be seen. But the trajectory of rates are down. If that’s the thesis, are we at a point where REIT’s are buy? especially ones whose rent’s are not going to be impacted by mild recession?
As you are reviewing, ignore mortgage REIT’s, office REIT’s and any REIT which has significant debt maturing in the next 1, 2 years. Of course there is always some debt to refinance, but debt maturity is more critical than ever. Remember, there is a huge ($1.5 Trillion yeap the big T) worth of commercial real estate is going to come for refinancing in the next 3 years, that means the postman is going to be busy delivering keys to the banks, assuming the bank is around to pick up the keys.
