Offic(e)ially a Problem in Real Estate?
Rising borrowing costs combined with residual high vacancy rates from the COVID-19 pandemic are triggering worries in office real estate. Recent reports indicate some property owners are even defaulting on loans rather than continuing with losing investments.
Markets, as usual, seem to have processed this information early in the news cycle. Real estate investment trusts (REITs) focused on office properties have fallen more than 47% since the start of 2022. That’s more than twice the drop of other REITs, which declined by around 21% for the period.
Of course, office REITs are only one segment of the market, accounting for about 6% of the Dow Jones US Select REIT Index in April. A broadly diversified REIT strategy offers exposure to many types of properties and structures, mitigating the impact of any one category and potentially providing more reliable outcomes for investors. And for investors dismayed by recent REIT market returns in general, history offers an optimistic note—average annual US REIT index returns1 have been very similar whether the prior year’s return was in the top quartile or the bottom quartile (12.8% vs. 13.5%).
Past performance is no guarantee of future results. Sector returns are derived by Dimensional using constituent data from the Dow Jones US Select REIT Index. GICS was developed by and is the exclusive property of MSCI and S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. MSCI data © MSCI 2023, all rights reserved. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Footnotes
- 1Past performance is no guarantee of future results. Calculation based on ranking calendar year returns from 1978 to 2021 for the Dow Jones US Select REIT Index into quartiles and computing the average return in the following year. Indices are not available for direct investment. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
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