How real estate investors should play higher interest rates

The real estate sector (XLRE) has been underperforming as uncertainty surrounding potential Federal Reserve interest rate cuts weighs heavily on the industry. To provide insight into the current state of the US housing market, Fundrise CEO and Co-Founder Ben Miller and CenterSquare Senior Investment Strategist Uma Moriarity join Market Domination.

Moriarity notes that shelter inflation is a significant component of the continued high inflation data, acknowledging that it is a "lagging indicator." However, she points out that "real-time shelter costs" are lower than what is being reported in inflation prints, suggesting that the fight against inflation is "trending in the right direction." With rate cuts still on the table, Moriarity believes the current high-rate environment is "providing a really good opportunity for investors today" in terms of real estate and homebuilder stocks.

Echoing Moriarity's sentiment, Miller highlights that "real estate moves inversely with interest rates." While rates have peaked, he believes "there's much more room for the rates to come down." As rates decline, Miller anticipates it will provide a "huge tailwind for real estate." Additionally, he notes that the real estate sector is beginning to see a normalization, expressing optimism that the sector has "hit the bottom," which could present a favorable buying opportunity for investors.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video transcript

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JULIE HYMAN: Shares of Prologis tumbling after the warehouse owner trimmed its full year guidance. The company saying it anticipates a slower leasing environment over the next quarter, citing persistently high interest rates. And real estate as a whole has suffered under the Fed's higher for longer policy. It's actually the worst performing sector this year, with the timeline for cuts pushing further out are there any opportunities there for investors. We're joined by Ben Miller, co-founder and CEO of Fundrise. And Uma Moriarty, center square senior investment strategist. Thank you both for being here.

So first of all, before we dig into how one might want to play real estate. I think the first question is whether people should be playing real estate. Uma, I'll start with you on this because this is a group that tends to move inversely with rates and as we've seen, rates are not really coming down here.

UMA MORIARITY: Yeah. That's a great question. And I think part of the question right to your point is when do we finally see the Fed cut rates from a policy perspective. We've been seeing these higher inflation prints. But one of the biggest parts of inflation as it comes through from reported data is shelter inflation. That's something as real estate investors we're seeing on a day to day basis in terms of where rents are compared to last year. We've been talking about how much of a lagging indicator that is. And so if you take into account, real time shelter costs.

It's much lower than what's being printed in those inflation prints. And so we think the fight in terms of inflation, is trending in the right direction and we still think maybe three rate cuts from the Fed could be in play this year. That being said, one of the biggest benefits of investors from a real estate perspective in terms of deploying new capital today, rates are really discounted from a valuation perspective compared to what you're seeing across the private market. So when you're trying to get exposure across the real estate asset class reads are providing a really great opportunity for investors today.

JOSH LIPTON: Ben, same question to you. Just start at a high level, should investors in your opinion, Ben, should they be moving into real estate right now is now a good time to commit capital in that sector?

BEN MILLER: Our view is real estate bottomed at the end of last year. And real estate moves inversely with interest rates. Interest rates have peaked. And in our opinion, they may go sideways for longer. But I don't think they're likely to go much up from here. And so there's much more room for the rates to come down. And as they do, when they do, that's going to be a huge tailwind for real estate. And so on the interest rate environment, I think it-- it went from 0 rates to 5. That was very hard on real estate. Now I think the asymmetry is on the other side of it.

And then on the ground operations, operations have been healthy. GDP growth has been strong. So tenants are paying rent, there was a oversupply in 2021, 2022. And now we're starting to get to a more normal market. So I'm optimistic that we've hit the bottom. And that this is a good time to be buying.

JULIE HYMAN: And Ben, just to be clear here. It's my understanding, you're investing where is in the public markets. You're investing privately in real estate. Is that correct and talk to us about the relationship between the two markets?

BEN MILLER: Yeah. I mean, we largely do private. We've done both. You want to go where the biggest discounts are. So the public markets had great discounts about a year ago. The REIT market has recovered a lot since then and the private markets, there's a lot more distress. There's a lot less liquidity. There's a lot of people who borrow too much in 2021. And I think you're starting to see some market forces that are going to push them to have to sell at deep discounts. And so at this point I think, although there's some.

Again, the public markets for real estate are a lot better than they were. But I think that there's a lot more sharpshooting opportunities in the private markets.