Real estate stocks have struggled since the Federal Reserve began raising interest rates in 2022, driving up borrowing costs and weakening the property market. While the sector saw a modest recovery in mid-2024, the outlook for 2025 remains mixed.
According to Adam White, senior equity analyst at Truist Advisory Services, investors should brace for a “stock-picker’s market,” where gains will vary by subsector rather than the industry moving in unison.
Office REITs Show Signs of Recovery
The residential real estate market is expected to remain under pressure due to elevated mortgage rates and limited inventory. The Fed’s signals of slower rate cuts have already driven up the 30-year mortgage rate, impacting homebuyers.
However, optimism is growing for office real estate investment trusts (REITs). “Office REITs have a key advantage in their cost of capital,” said Uma Moriarity, senior strategist at CenterSquare Investment Management. Prestigious properties in prime markets, often owned by REITs, are well-positioned for a rebound.
The S&P Composite 1500 Office REITs Index has plunged more than 30% since early 2022, while the broader S&P 500 rose 24%. Yet, 2024 has seen office REITs deliver a total return of over 28%, a major turnaround from their 2% gain in 2023 and a 38% decline in 2022.
Office REITs have a key advantage in their cost of capital
High-profile companies like SL Green Realty Corp., Vornado Realty Trust, and Highwoods Properties have posted year-to-date gains of 30% to 50%, while Office Properties Income Trust—heavily reliant on government tenants—has plummeted by 85%.
Residential Sector Faces Headwinds
The outlook for residential real estate is less rosy. Homebuilders benefited from the tight resale market in recent years, but the sector is cooling after a 74% rally during the Fed’s rate hikes. Elevated mortgage rates have made current homeowners hesitant to sell, further constraining supply.
The SPDR S&P Homebuilders ETF has seen its largest quarterly outflow in two years, while the S&P Composite 1500 Homebuilding Index is down 25% since mid-October, entering bear market territory.
Selectivity Will Be Key in 2025
Analysts advise investors to be selective when approaching real estate in 2025. Instead of broad sector funds, White suggests focusing on specific areas with growth potential, such as data center REITs, senior housing, and real estate services companies.
“You’ll need to be more selective,” White said. “Making the same returns next year won’t be as easy.”
