Real Estate Stocks Sink as Sticky Inflation Threatens Higher-for-Longer Rates

U.S. real estate stocks tanked Wednesday after stubbornly high inflation data amplified concerns interest rates will remain elevated for some time and further distress the financial plumbing of America’s property sector. 

Self-storage companies, real estate investment trusts (REIT) exposed to office properties, and homebuilders were among the S&P 500’s worst performers Wednesday.

Extra Space Storage (EXR) and Public Stores (PSA) were down 6.8% and 6.0%, respectively at around 2:45 p.m. ET. Homebuilder D.R. Horton (DHI) was off 5.8%, while rival Lennar (LEN) slid 5.3%. Boston Properties (BXP), a developer of high-end workplaces, fell 6.4%, while CoStar Group (CSGP), a provider of commercial real estate analytics, dropped 5.5%.

Inflation accelerated in March according to Wednesday’s Consumer Price Index data. The report sent Treasury yields soaring as traders bet the data would compel the Fed to delay much-anticipated interest rate cuts.

The federal funds rate, the Federal Reserve’s benchmark interest rate through which it influences rates throughout the U.S., has been at a 23-year high between 5.25% and 5.50% since July 2023. As recently as early March, markets forecast a more than 50% chance the Fed would lower interest rates by a full percentage point by the end of the year. Now those forecast odds stand at about 5%.

Higher-for-longer interest rates are expected to weigh on both residential and commercial real estate markets. The housing market entered a deep freeze last year as soaring mortgage rates put homeownership out of reach for nearly all first-time buyers. Rates had retreated in recent months—in part in anticipation of impending rate cuts—boosting hopes of a busy spring selling season. 

Commercial real estate has also struggled under the weight of higher rates and historically low post-Covid occupancy rates. The prospect of lower interest rates, now largely dashed, had eased some of that pressure for property owners facing pressure to refinance loans as pre-Covid leases come up for renewal in the next couple of years.