01/26/2023 | by Sarah Borchersen-Keto

REITs have historically made solid returns following the onset of a recession, particularly in the early stages of the cycle, making this an ideal time for investors to begin building an exposure to the asset class, says Rich Hill, head of real estate strategy and research at Cohen & Steers.

Speaking on the Nareit REIT Report, Hill said REITs have historically produced average 12-month forward returns of more than 10% following the onset of a recession, with early-cycle returns exceeding 20%.

Hill said that commercial real estate fundamentals are on a solid footing, especially for REITs. “We do expect deceleration in growth as the broader economy slows, but our expectation is for REIT fundamentals to perform better than what typically occurs during recessionary periods.”

A key reason for this is favorable supply versus demand dynamics. “Everyone talks about inflation being a bad thing, but in this case, inflation's maybe actually a good thing because it's limiting supply. It's difficult to build new buildings given high construction costs, high labor costs, and high financing costs,” he said. Hill added that he expects a much better outlook for inflation in 2023.

Meanwhile, Hill said the discrepancy in valuations between private and listed real estate is unlikely to persist in 2023. Cohen & Steers expects private valuations may be down 10% to 20% in the year ahead.

“We think adding a 10% to 20% allocation of listed real estate to a portfolio of private real estate can simultaneously reduce volatility and increase returns. We probably favor being a little bit more overweight listed right now, given the supportive backdrop,” Hill said.

Hill also noted that if the financing markets stabilize or even improve, and fundamentals remain solid, there is potential for M&A activity later in 2023. Overall though, transaction volumes are down, distress is still low, and there's a lot of money on the sidelines. “We're sort of in a wait and see discovery process right now,” he said.

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