In its its 2024 outlook for real estate investment trust stocks, Morgan Stanley analysts are more favorable to open-air shopping centers than shopping malls and see potential benefits for storage REITs if home sales rise.
The analysts led by Ronald Kamdem expect the overall REIT sector has “more room to run,” but they see the recent rally in office REITs running out of steam soon.
REIT stocks historically outperform the S&P 500 after the Fed pauses rate hikes. “Our analysis suggests the last four times the Fed was in a tightening cycle and then paused, REITs were up +30% on average within 16 months (vs. S&P +20%),” they wrote in a note to clients.
Since October, REITs rose 23%, compared with the S&P’s 15% increase, as real rates declined 82 basis points from their peak, the analysts said.
The year-ahead outlook encompassed several upgrades and downgrades:
Retail: Regency Centers (NASDAQ:REG) raised to Overweight and named Morgan Stanley’s Top Pick in REITS. Urban Edge Properties (NYSE:UE) upgraded to Equal-Weight. Simon Property Group (NYSE:SPG) downgraded to Equal-Weight. Office: Highwood Properties (NYSE:HIW) downgraded Underweight; Vornado Realty Trust (NYSE:VNO) reiterated at Underweight. Storage: The analysts upgraded Extra Space Storage (NYSE:EXR) to Equalweight as storage REIT pricing improved in Q4 2023 and lower interest rates may be a tailwind for housing transactions. They also see defensive growth sectors continuing to outperform, reiterating Overweight ratings on Prologis (NYSE:PLD) in industrial REITs and Welltower (NYSE:WELL) in senior housing.
For the stocks that were either upgraded or downgraded, the SA Quant rating rated Extra Space (EXR) a Buy and Regency (REG), Urban Edge (UE), Simon Property (SPG), and Highwoods (HIW) as Holds.
The Real Estate Select Sector SPDR ETF (XLRE) edged up 0.1% in Thursday midday trading.