Skip to Content
Quarter-End Insights

Real Estate: Fundamentals Still Show Solid Growth

Amid rising interest rates and slowing construction starts, underlying commercial real estate performance is healthy.

Mentioned: , , , , , , , , ,
  • Morningstar's real estate coverage appears fairly valued at current levels. It is trading at a market-cap-weighted price/fair value of 0.98, only a 2% discount to what we believe the stocks in the sector are worth.
  • We view themes in commercial real estate as generally defensive in nature, with lingering concerns about increasing bond yields associated with future rate hikes.
  • Despite these concerns, we continue to focus on underlying performance, which has remained healthy overall, as real estate investment trusts have been focused on repositioning and strengthening their portfolios, deleveraging, and capital recycling.
  • Construction of new property continues as companies look for higher returns, though supply may have peaked in many markets and sectors. Rising construction costs may lead to slowing supply growth over the next few years.
  • At current price levels, we see attractive investment opportunities scattered across various asset classes within our REIT coverage.

U.S. Real Estate Outlook
By Kevin Brown
The U.S. real estate market increased slightly in the third quarter, performing relatively in line with the broader U.S. market. The 10-year U.S. Treasury yield increased rapidly at the start of the year but has stayed near 2.9% since mid-February, bringing relative stability to real estate stocks. Given the circumstances, many investors wonder whether we are near the peak of the commercial real estate cycle--higher interest rates could pressure growth rates, cap rates, return expectations, and ultimately asset prices. Also, to the extent that low interest rates have steered investors searching for higher yield and capital preservation toward REITs, the same funds could flow out of REITs if interest rates rise, further pressuring commercial real estate valuations.

Morningstar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.