REITs Struggle To Keep Up With The Market, But Private Real Estate Continues To Show Promise

As 2023 unfolds, Real Estate Investment Trusts (REITs) are facing a challenging landscape, underperforming when compared to the overall stock market. The Real Estate Select Sector SPDR Fund, which is considered to be the benchmark ETF for the REIT sector, has dipped by 11.16% from its year-to-date (YTD) high, while the S&P 500 is sitting only about 1.2% below its high for the year. This downturn is particularly concerning for major REITs, as they grapple with the implications of this trend on their long-term growth and stability.

Realty Income Corp O is currently trading at almost 8% below its 2023 high, while WP Carey Inc WPC has fallen more than 14% from its high of $85.55 in January.

Two of the primary factors contributing to the recent underperformance of REITs are the rising interest rates and the recent bank failures. However, the fundamentals of many of these REITs remain strong. Their performance is tied more to stock market fears than the actual performance of the real estate market.

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In stark contrast, private market real estate investors continue to see positive returns. For example, Trion Properties' latest offering is expected to provide investors with a 17.47% Internal Rate of Return (IRR) over the four-year hold period. This investment firm has produced an impressive average IRR of 25% for accredited investors through its real estate offerings.

When asked how Trion Properties manages to provide market-beating returns, Managing Partner Max Sharkansky attributes their success to smart buying practices. "I think that we buy well. You make the money on the buy, so that's half the battle. We pick up a lot of properties off-market, so we're starting with a lower basis. We're also buying in great markets," says Sharkansky.

Sharkansky also highlights the company's focus on markets with significant growth potential, such as South Florida. "Florida's growth story is unbelievable," he explains. 

Another crucial factor in Trion Properties' success is its value-add strategy. This approach involves acquiring properties that need improvements, making necessary renovations and increasing the property's value by raising rents or reducing expenses. This creates a higher return on investment for investors.

Considering the current underperformance of REITs and the promising returns from private market real estate investments, some investors might find private market opportunities more appealing. 

For one, private market investments often provide better insulation from stock market fluctuations, as their performance is driven by the real estate market rather than broader market fears. This allows investors to benefit from the strong fundamentals of real estate without being subject to the whims of the stock market.

Moreover, private real estate investments often boast more attractive returns when compared to publicly traded REITs. The ability to invest in off-market properties, focus on high-growth markets and implement value-add strategies in multifamily real estate enables private market investments to generate higher IRRs. 

Investors seeking to diversify their portfolios and potentially achieve better returns in the current economic climate may find private market real estate investments a more attractive option than publicly traded REITs.