US Real Estate Sector Plunges, Traders Reassess March Rate Cut Bets

Zhitong App noticed that real estate stocks became the biggest drag on the S&P 500 index on Wednesday as traders withdrew their bets on a rate cut by the Federal Reserve.

The industry was one of the biggest beneficiaries of rate cut expectations in the fourth quarter of last year and is highly sensitive to the overall development of the economy and the market. Therefore, as traders reduce their bets on a rate cut at the Fed's March meeting and the yield on 10-year US Treasury bonds rises to 4.11%, the highest level since December 12 last year, the real estate market is bound to be impacted.

"We believe that as we approach the end of the month and the Fed meeting, the strong momentum of the fourth quarter will be rewarded," said Joe Gilbert, portfolio manager at Integrity Asset Management, LLC. "Overall, all real estate stocks will be affected, but we are more cautious about office REITs."

Of course, from a broader perspective, real estate stocks are only giving back some of their gains. The strong rebound in the fourth quarter of last year pushed an index for the industry to its highest level since 2009. The index fell 1.9% on Wednesday and has fallen 3.7% since the beginning of the year, making it the third worst-performing sector in the S&P 500 index.

Real estate stocks have struggled to recover stability for most of 2023, due to the shift to remote work, panic over commercial real estate, and regional banking crises putting pressure on the industry. Investors are now selling stocks, and the office real estate investment trust (REIT) index is heading for its worst week since November last year.

Analysts at Trust Securities, led by Ki Bin Kim, wrote in a report to clients, "The overall fundamentals of office buildings are clearly poor, and 2024 could be worse in terms of supply, demand, occupancy rates, and rents." "We still believe that some stocks are undervalued, but there needs to be a catalyst to generate investor interest and reprice stocks," they added, citing SL Green Realty Corp. and Vornado Realty Trust as examples.

Keith Lerner, Chief Market Strategist at Trust Advisory Services, said, "It is worth noting that many areas, including real estate investment trusts, have returned to the trading levels of December 13, the last Federal Open Market Committee meeting and press conference, when the Fed was considered more dovish." At the same time, as the Wall Street panic index VIX climbed above 15 for the first time since November last year, market volatility has returned. The yield on the US 10-year Treasury bond rose to 4.1%.

The latest retail sales data released on Wednesday further intensified market frenzy, highlighting doubts about whether the market can expect interest rates to fall in March, as stronger-than-expected data showed that consumer resilience has increased at the beginning of the new year.

Steve Sosnick, Chief Strategist at Interactive Brokers, said, "The real estate industry is prone to disappointment." He added that if the pace of interest rate cuts does not have the expected impact, traders should expect uncertainty to be reflected in the future trends of this industry.