Principal Asset Management’s Hill Sees REITs Shifting Into Cycle Expansion

Principal Asset Management’s Hill Sees REITs Shifting Into Cycle Expansion

Rich Hill, senior managing director and global head of real estate strategy and research at Principal Asset Management, suggests that public real estate markets have entered a new phase. Managing a portfolio that spans four distinct “quadrants” of the industry—private equity, public real estate investment trusts (REITs), private commercial real estate (CRE) debt, and commercial mortgage-backed securities (CMBS)—Hill notes that the $20 billion allocated to public REITs is sending a critical signal.

According to Hill, listed REITs often act as a leading indicator for the broader property cycle. After troughing in October 2023, the sector rallied 60 percent on a full-return basis. While private real estate valuations have risen for eight consecutive quarters, the public markets have recently crossed a threshold where valuations exceed prior cycle peaks. Hill interprets this as a transition from a recovery phase into an expansion phase.

Hill draws parallels to historical market behavior, suggesting current conditions echo the early 2000s. During that period, real estate gained favor as technology stocks retreated and the economy faced a recession. Similarly, Hill observes that predictable earnings and income-driven total returns are becoming more popular as investors rotate away from areas like tech and AI.

Under Hill’s framework, real estate cycles are lengthy, often spanning 16 to 18 years. He categorizes these periods into downturns (roughly 1.5 years), recoveries (approximately 2 years), and expansions (about 12 years). With public markets indicating the early stages of expansion, he anticipates that private real estate valuations will eventually follow suit, moving beyond their own recovery phase.

About AvalonBay Communities Inc: The firm is an equity REIT and a member of the S&P 500. AvalonBay develops, redevelops, acquires, and manages apartment communities in major metropolitan areas, including Boston, New York/New Jersey, the Mid-Atlantic, Seattle, and Northern California.

What to watch

• Future earnings reports from public REITs to confirm the expansion thesis.
• Private real estate valuation trends over the next 12 to 18 months.
• Relative performance shifts between technology sectors and income-driven real estate assets.

Source: original release