Top-Performing Reits To Watch As U.S. Commercial Real Estate Prices Fall

Chief economist of Moody's Analytics, Mark Zandi anticipates further CRE price declines in the coming year and has forecasted a 10 percent fall from their peak by 2025.

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Along with the fall in prices, Zandi expects a growing number of companies to default on their CRE investments in the coming years, as interest rates and expenses further shake up their balance sheets.

Many experts are said to have viewed CRE price declines – the first of its kind since 2011 – as a sign of financial stress across several market industries, more alarmingly in the banking sector.

At the final stretch of the fourth quarter of 2022, banks accounted for nearly 60 percent of the $3.6 trillion commercial real estate loans still outstanding.

After the collapse of California-based silicon valley bank (SVB), followed by several other regional banks, experts and government economists are greatly concerned about the potential credit losses banks could undergo if they default on their real estate debt.

The Federal Reserve's aggressive monetary tightening has led to skyrocketing mortgage rates, after the central bank initiated lifting interest rates from near-zero back in March 2022.

However, now with CRE prices starting to fall, and broader economic problems continuing to challenge the real estate market, seasoned investors are shifting their real estate investment strategies and hunting around for opportunities that could potentially cushion their portfolios as fears fanned by banking jitters and the federal debt ceiling crisis loom up ahead.

Now might be one of the most confusing moments for investors digging around the reit sector , as prices continue to dwindle, and the pendulum swings back and forth. However, some contenders continue to stand out in the crowd, even as volatility in the domestic property market persists.

Here's a look at some of the top-performing REITs that present investors with the best value and growth momentum despite the challenging market conditions.

Seen by some investors as a blue-chip REIT investment, AvalonBay (nyse:avb ) has seen its price target increase by 5.37 percent in the last month. AvalonBay has a long-standing history of steady performance, with the majority of its portfolio dedicated to Class A apartment communities.

The Year-to-date (YTD) performance of AVB has remained steady, gaining nearly 15 percent on the market.

AvalonBay currently holds a price target high of $220.00 per share, and a low price target of $153.00 per share. Prices of AVB have shifted over recent years, as demand for rental apartments continues to grow on the back of steady real estate prices. AVB currently pays a 3.9 percent dividend yield.

Another fast-growing REIT that investors have been keeping on their watchlist is Two Harbors (nyse:two ) which has seen YTD price declines of close to 4 percent. However, the company has a healthy balance sheet, seeing an overall 17 percent increase in its net income ending the full fiscal year 2022.

The investment company finances and manages Agency residential mortgage-backed securities (Agency RMBS) and mortgage servicing rights (MSR).

During its q1 2023 earnings call , TWO declared a stock dividend of $0.60 per share, marking a 3.6 percent return on overall book value.

While TWO prices remain steady, with prices zig-zagging between $12.00 and $14.00 per share, experts suggest that TWO remains a strong pick for value investors that are willing to bet on safer, and more affordable REIT options.

WP Carey (nyse:wpc ) is considered to be one of the more diversified REIT options on the market for investors looking to have broader exposure to the real estate market. Currently, WP Carey has retail, self-storage, hospitality, single-tenant industrial clients, and warehouses under its belt, among others.

Concerning its balance sheet and overall financial performance, WCP saw its net income jump by 87 percent year-over-year (YOY) and currently has a market cap of more than $14 billion. Its most recent dividend yield came in at 5.8 percent.

The REIT that has more than 1,400 properties in its portfolio has attracted large-cap investors that are willing to take safer bets on more diversified REIT stock options. The company has enough legroom to see it navigate challenging real estate conditions, having stretched its portfolio across much of North America and the European market.

Crown Castle (nyse:cci ) invests in a collection of highly specialized infrastructure, servicing companies in the telecommunications and software industry. Its portfolio consists of more than 40,000 mobile cell towers, 85,000 miles of fiber-optic cables, and an outstanding 120,000 small cell nodes.

The ever-growing demand for mobile cell towers in recent years has meant that the company has grown its portfolio share, as experts suggest that Crown Castle has gained tremendous momentum as an infrastructure REIT.

The company has a market cap of close to $50 billion, helping to reshape the public infrastructure landscape, and opening new opportunities for investors looking to gain more momentum from the growth of global network infrastructure.

Headquartered in New York, Apollo Commercial (nyse:ari ) currently has a market cap of just over $1.4 billion and has seen steady growth over the last several years, witnessing a strong first quarter of the year.

During its q1 2023 earnings call , earnings per diluted share was roughly $0.32 per share. Revenue increased by 81 percent, while net income jumped by 221 percent for the full year, ending March 2023.

The company reported that its senior floating rate loan portfolio helped it increase its distributable earnings, in excess of its common stock dividend , according to the proceedings published by Apollo Commercial during its recent earnings call.

There's been a lot of upside for ARI, seeing that it holds the majority of senior mortgages and mezzanine loans throughout the U.S. and European markets. These loans are mostly collateralized by commercial real estate.

Stress in the commercial real estate market, on the back of higher interest rates and slowing demand for office space, as remote working trends persist has for months been a worrisome indication for experts that CRE prices will start to wane.

While the higher interest rate environment, among other things, has already created challenges for the commercial property market, some experts review that real estate investment trusts' balance sheets and debt could suggest they remain well-positioned against economic headwinds.

A combination of prolonged economic problems has thrown a spanner in the works for the economy's supposed soft landing. For much of last year, stock performance, including REITs, was significantly down.

In December 2022, REITs witnessed their first back-to-back months of gains, marking a 3.33 percent total return in November. By the end of last year, the Dow Jones U.S. Total Stock Market Index declined by 19.5 percent, the Russell 1000 fell close to 20 percent, and all equity REITs slid by 24 percent.

Despite their lower stock market valuation, REITs delivered record earnings and overall improving operational performance against the backdrop of wider economic concerns.

Overall, experts suggest that the coming year could see more interest from institutional investors recognizing the performance of REITs, as they provide them with broader access to emerging markets, and global property sectors and introduce them to leading ESG performance indicators.

Another facet that could be considered, is that falling prices, even by marginal increments could mean that institutional investors could jump onto this opportunity as it provides them with more affordable valuations, while at the same pace diversifying their portfolio performance.

After all, the current economic climate has called for many investors to build new strategies as they navigate turbulent market conditions and slow economic performance. While REITs might currently sit at the back of investors' minds, there could be potential upside in the long term.