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More to Revival of Listed US Real Estate Than Rate Cuts
Listed U.S. real estate emerged as the second-best performing sector behind utilities in Q3 2024. The sector posted a 17.3% return versus 6.2% for the broad-market MSCI USA Investable Market Index (IMI), a sharp reversal after months of poor performance following the Federal Reserve’s rate hikes that began in March 2022.1 The recent shift toward more favorable rates has likely boosted the appeal of listed real estate, but a more fundamental and compositional shift may be behind investors’ renewed attention.
Sector changes — keeping up with the times
Since its split from financials into a stand-alone sector eight years ago, the GICS® real-estate sector has continued to evolve.2 In 2023, the specialized category of real-estate investment trusts (REITs) was replaced by new constituent sub-industries. One of these, data-center REITs, which has been supported by the rise of AI, accounted for 9% of the MSCI USA IMI Real Estate Sector Index as of Sept. 30. Similarly, telecom-tower REITs, linked to the growing demand for mobile and broadband infrastructure, has become the second-largest sub-industry at 12% of the index. In contrast, office REITs, in line with lower occupancy rates after the COVID-19 pandemic, made up just over 3% of the index at quarter-end, down from 9.5% at year-end 2019.
Deeper rate declines, better performance
Historically, interest-rate changes have led to pronounced differences in sector performance. Our focus here is on how the U.S. real-estate sector has responded to rising and falling rates over the last 25 years. Our findings align with intuition: the sector has outperformed the broader U.S. equity market during periods of declining rates. Moreover, on average, the deeper the rate decline, the stronger the sector’s relative performance has been.
Evolution of the real-estate sector: Top 10 sub-industries over time
Real estate outperformed the MSCI USA IMI in falling-rate environments
1 Q3 returns in gross USD from July 1, 2024, to Sept. 30, 2024. The MSCI USA IMI Real Estate Index was down 9.3% from Feb. 28, 2022, to June 28, 2024, in contrast to the positive 26.4% performance of the MSCI USA IMI over the same period.
2 The global industry classification standard (GICS) is the industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.
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