REITs Under Pressure After Bank Failures

News March 27, 2023 at 05:08 PM

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Investor concerns over the potential effects on the economy from the banking crisis appear to have created more pressure for publicly traded real estate investment trusts (REITS), as well as some funds that focus on them.

The Vanguard Real Estate Index Fund (ticker VGSLX), which invests in REITs that buy office buildings, hotels and other properties, is down more than 8% over the past month, for instance.

Office REITs appear to have been particularly hard hit. Morningstar reported Friday that office REIT stocks have dropped about 24% on average this month.

And Liz Ann Sonders, Charles Schwab & Co. chief investment strategist, tweeted Monday that the S&P 1500 Office REITs Index is down nearly 45% over the past 200 days and hovering above its 2009 low.

Sonders noted last week that REITs took the biggest hit after the Federal Reserve's press conference Wednesday and had been the second-worst performer month to date at that time.

While real estate stocks overall have fallen over the past year, bank failures this month have stirred new concerns, as investors worry that economic ripples could result in new strains for REITs, according to Morningstar.

Morningstar quoted Bianca Rose, Morningstar Investment Management senior portfolio manager, as saying that recent bank collapses underscored tenant risk and financial system stability as two vulnerabilities for the real estate sector.

As bank troubles likely lead to tighter lending standards, some businesses that got by when borrowing was easier and inexpensive may struggle to meet financial obligations, she said in the article.

"What happens if all these businesses that were doing well from easy money now go bust? They're tenants to someone," Rose said.

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