2023 REIT Outlook: What to Expect During a Downturn

Equity REITs saw a roughly 38% jump in total returns in 2021, followed by a 27% drop in 2022, according to the Nareit trade organization. But will REITs be in positive or negative territory this year in terms of returns?

Even with interest rates and inflation still at high levels and the prospect of a recession on the horizon, 2023 could prove to be a better year for REITs than 2022. Experts believe the REIT sector as a whole should be able to withstand this year’s headwinds thanks to healthy balance sheets and long-term debt locked in at low rates.

Will REITs rebound in 2023?

WealthManagement.com recently declared that publicly traded REITs are poised to bounce back in 2023, with total returns climbing a little over 10% in January.

Fitch Ratings, which produces credit ratings and research, offers a less-rosy forecast for 2023.

“Challenging economic and financial trends will continue into 2023 after emerging in 2022, at best putting a damper on fundamentals for recently better-performing sectors, and at worst further damaging credit profiles for REITs that had already been under pressure,” says Fitch.

REIT interest rates in 2023

One key question for REITs this year is how they’ll be affected by interest rates, which continue to go up in line with rate hikes imposed by the Federal Reserve.

In its 2023 forecast, Nareit explains that overall REIT returns have been positive, often outdistancing the S&P 500, amid a rise in interest rates. How is that possible? Nareit attributes this to the fact that an increase in interest rates generally signals improvement in underlying fundamentals.

“Market interest rates typically increase during periods when macroeconomic conditions are strengthening, the same strengthening that often drives positive REIT investment performance,” says Nareit.

REITs also are buoyed by strong balance sheets and long-term, fixed-rate debt.

Overall, Nareit says REITs are likely to remain resilient against higher interest rates in 2023.

Are REITs a good investment during a recession?

Based on their recession-era performance, REITs can be a good investment during a recession.

“Despite economic headwinds and weakness in valuations, equity REITs have proven to be quite resilient from an operational perspective, and it is clear that REITs are well-positioned for ongoing economic uncertainty in 2023,” says Nareit.

Nareit data shows publicly traded REITs outperformed private real estate in four of the past six recessions, with an average spread of 30%. And when publicly traded REITs underperformed private real estate, the average shortfall was 7.6%, Nareit says.

Entrepreneur.com notes that investing in a stable REIT can help generate steady income during an economic downturn and boost the odds of surviving a downturn.

Are REITs a hedge against inflation?

According to Nareit, REITs can serve as a hedge against inflation. 

“Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods,” says Nareit.

In all but two of the past 20 years, dividend increases for REITs have outpaced inflation, according to Nareit.

Investopedia calls REIT investments “the most feasible way to invest” in real estate during inflationary periods.

Are REITs a good investment over the long term?

REITs can be a good long-term investment. In fact, a 2021 survey conducted by research and consulting company Chatham Partners and sponsored by Nareit found that 83% of financial advisers in the U.S. recommend REITs to their clients.

Nareit explains that REITs historically have delivered competitive total returns, thanks to steady dividend income and long-term capital appreciation.

“Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns… REIT returns tend to ‘zig’ when those of other investments ‘zag,’ helping to reduce a portfolio’s overall volatility and improve its returns for a given level of risk,” says Nareit.

REIT sectors to consider for investments in 2023

Several REIT sectors are worth considering for investments in 2023. Here are four of them.

1. Residential REITs

Amid an ongoing housing shortage, high interest rates and high home prices, renting an apartment or a single-family home is an affordable, attractive option for many Americans, according to investment giant Fidelity. Of course, this bodes well for REITs that own residential rental properties.

“Compared to other types of REITs, residential REITs tend to carry less debt and are therefore less likely to need to refinance their debt at higher rates in the near term,” Fidelity adds.

2. Industrial REITs

To take advantage of the continuing growth in e-commerce, investors might want to look at industrial REITs, as well as data center and infrastructure REITs. These sectors have been among the top REIT performers in recent years.

“Taken together, data center, industrial, and infrastructure categories form a synergistic ‘triad’ for the e-commerce economy,” says investment giant Schwab.

3. Healthcare REITs

Growth in the U.S. senior population and in demand for medical services underscores the ongoing strength in healthcare REITs, according to Schwab. Healthcare REITs own and manage properties like medical office buildings, hospital and skilling nursing facilities.

4. Hospitality REITs

Generally, hotels, motels and resorts owned by hospitality REITs are still recovering from the travel slowdown caused by the pandemic. 

However, leisure and business travel are witnessing a reversal in their fortunes. Economist Intelligence predicts global tourism will increase 30% in 2023, and business travel is staging a slow comeback (although business travel may never return to its pre-pandemic levels).

What are mortgage REITs?

In the REIT world, real estate professionals often concentrate on equity REITs. But another kind of REIT, the mortgage REIT (or mREIT), shouldn’t be overlooked.

Mortgage REITs supply financing for income-generating real estate through the purchase or origination of mortgages and mortgage-backed securities (MBS) and reap income from interest produced by these investments. These REITs usually specialize in residential or commercial mortgages.

By contrast, equity REITs make money by renting or selling properties they own.

Investors can buy shares of a publicly traded mREIT on a stock exchange, or through an exchange-traded fund (ETF) or mutual fund. Shares of a private mREIT are typically purchased only by institutional investors. 

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