Real estate stocks to avoid — and one to buy — as interest rates rise

Surging mortgage rates have clouded the outlook for the real estate industry. Most of the industry’s stocks have lost their appeal but a few still command a “buy” recommendation from analysts.

There’s no shortage of bad news to explain the poor performance of real estate stocks this year. The sector has been badly hit by rising interest rates that have made houses less affordable to buyers and investors are unloading their shares of real estate companies expecting more damage.
Households that are already saddled with inflation at a four-decade high are grappling with surging mortgage rates. Last week, the 30-year borrowing cost for homebuyers climbed to the highest since 2008, according to Freddie Mac data. All that pain is pushing many to defer plans to buy a new home, as they brace for more economic woes amid growing risks of a recession.
Existing-home sales fell for a fourth straight month in May, declining 8.6% from a year earlier, according to the National Association of Realtors. The association’s chief economist Lawrence Yun expects the slump to continue in the coming months amid “housing affordability challenges from the sharp rise in mortgage rates this year.”
The Federal Reserve is expected to increase its key interest rates to 3.4% by the end of this year, the highest in 14 years, according to policy-makers’ median projection released last week. The forecast further dims the outlook for the real estate industry that’s already taken a hit from the biggest Fed rate hike in almost three decades.

What should investors do?

MarketEdge is recommending investors avoid 58 of the 69 companies involved in real estate operations with a market capital of at least $2 billion, according to data from a Charles Schwab stock screener. The “avoid” rating covers companies including Prologis Inc. (PLD), Public Storage (PSA) and Crown Castle International Corp. (CCI).
Stocks of companies involved in real estate operations tumbled 34% in the past year, slumping more than twice as fast as the S&P 500 index, according to a Morgan Stanley note. Residential & commercial REITs declined at a slower pace of 12%.
Morgan Stanley aptly described the turmoil that has plagued the industry. “The week felt like the fifth stage of grief — acceptance that the Fed must be aggressive against inflation, potentially triggering a recession,” the bank’s analysts including Richard Hill and Ronald Kamdem, said in REIT Weekly published June 20.

Bright spots in the real estate industry

Companies that operate towers are a few of the bright spots in the real estate industry. American Tower Corp. (AMT) is one of them. Analysts from JPMorgan Chase & Co., Bank of America Securities and RBC Capital are among those who have a “buy” recommendation on the stock, according to data on ETrade’s website.
Analysts on average expect American Tower shares to rally to $287.60, representing a 12% upside from its price of $256.96 as of 2:03 p.m. in New York, according to ETrade data.
Credit Suisse also expects the stock to outperform, citing its robust domestic tower activity through 2024, improving international churn dynamics, its potential for additional European expansion and limited supply chain impact. The Swiss bank’s target price is $313, higher than the average, according to a note early this month.

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