Office-property woes are driving REIT carnage as 2022 shapes up to be second-worst year on record – MarketWatch

Go ahead, blame remote work.

The office sector has been the biggest drag on real-estate investment trusts in 2022, which is shaping up to be their second-worst year on record, according to Morgan Stanley’s REIT outlook.

Total returns were pegged at nearly -37% (see chart) on the year through Dec. 9, ranking office as the biggest drag on REITs. Overall, REITs were headed for a roughly -22% total return, on pace for the worst year after 2008, according to the Morgan Stanley team.

Shares of office REITs are sinking. Thomson Reuters Eikon; SNL; Morgan Stanley Research

“REITs had a tough year,” the team wrote Friday. But they also expect more pain in 2023, given that REIT and S&P 500 earnings both likely still need to reset lower, as do commercial real-estate prices.

“Indeed, [commercial real-estate] prices are still up +7.3% [year over year] and we see prices falling -15% over the next 12-24 months for apartment and industrial, -27% for quality retail, and -37% for office,” they wrote.

The U.S. housing market sputtered this year after the Federal Reserve in March kicked off its campaign of interest-rate increases to lower inflation. The toll on commercial properties, however, has been harder to detect, outside of lingering low levels of workers returning to the office, slashed REIT equity prices DJDBK, -2.68% and redemption limits recently placed on several major private real-estate funds.

Also see: Blackstone’s Gray: ‘We didn’t want to have to sell assets at the wrong time, under pressure,’ after $69 billion REIT limits withdrawals

REITs invest in all types of real estate, from

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