Real estate stocks have been hard hit this year. Many real estate investment trusts (REITs) and high-growth real estate tech stocks are down anywhere from 10% to 40%, some even more.
With soaring inflation, rising interest rates, a cooling real estate market, the stock market headed for bear market territory, and a potential recession nearing, there's rightful concern over whether right now is a good time to invest in real estate stocks.
While no one can truly say where prices or the economy is going, here's a closer look at the bull and bear cases for investing in real estate stocks today.
The case against buying real estate stocks right now
If economic volatility continues on its current trajectory, there is a very good chance the economy will enter a recession. Recessionary periods aren't always bad for the stock market or the real estate industry, but there are indicators that both markets could be hurt in a recession.
Real estate demand, particularly residential housing, is already faltering. Less demand for rental properties can lead to higher vacancy rates and lower rental rates, which lower companies' earnings. Higher interest rates could also lead to higher costs for borrowing, something REITs rely on heavily to fund their growth. These factors combined mean real estate stock values could drop in the near future.
However, there is no guarantee prices will fall further. Many economic indicators remain positive today, including job growth and unemployment rates. And not all real estate industries are seeing the same rate of slowing. Industrial real estate, data centers, and communications infrastructure, for example, are still seeing robust demand and impressive year-over-year growth.
The case for buying real estate stocks right now
REITs are required to pay 90% or more of taxable income in the form of dividends, making them extremely reliable dividend payers. And since dividend yields and prices have an inverse relationship, the recent stock market decline makes it a prime buying opportunity.
Some of the most popular, and often premium-priced stocks are on major sale right now. Prologis (PLD 0.72%), for example, is the second-largest REIT by market capitalization and the largest industrial operator in the world.
In recent years, the stock traded for around 25 to 28 times its price to funds from operation (FFO), a metric that works similarly to the price-to-earnings (P/E) ratio for stocks. But with its share price down 34% this year, it's trading at 17 times its FFO today and the company has had incredible earnings growth this year.
Long-term investors know bear markets and recessionary periods are a part of investing. Values may drop, but it doesn't necessarily mean the moneymaking ability of the stock over the long term is any less valuable. Today's pricing definitely provides good buying opportunities, even if prices are to fall farther.
So what?
I'm still very bullish on real estate stocks because today's discounted pricing will likely lead to superior returns when held for the long term. I'm young and have time on my side, meaning I can ride out any volatility that may be on the way.
This may not be the same for you. Investors closer to or currently in retirement may want to focus on more reliable dividend-paying stocks like National Retail Properties, Realty Income, and W. P. Carey over riskier real estate growth stocks.
I'm practicing patience and will continue to invest in real estate companies with strong track records, healthy balance sheets, ample growth opportunities, and stable performances.
