A Target Rich Environment: +2.16% in January, +12.4% TTM

“This is what I call a target rich environment” – Maverick, Top Gun

• PERFORMANCE:  Serenity Alternative Investments Fund I returned +2.16% net of fees in January vs the REIT index at +3.07%. Over the trailing twelve months (TTM) the fund has returned +12.4% vs +5.0% for the REIT index.

• GROWTH ACCELERATING: January ISM data just hit a 4-year high. Can cyclical REITs accelerate along with the economy?

• INFLATION COOLING: Shelter should continue to pull the CPI lower. Decelerating inflation may be set to re-ignite the bond market and Net Lease REITs.

• HOUSING RAMPING? With mortgage rates falling, is the housing market set to unlock? Self-Storage REITs would certainly benefit.

There has been no shortage of market-alarming headlines so far in 2026.

Greenland, ICE, protests in Iran, a new Fed chair…

In the modern 24-hour news cycle, there is always plenty to be worried about.

And yet…the January ISM report just posted its best reading in 4 years.

Inflation has fallen from +3.0% back to +2.7% and could continue to move lower.

Even the beleaguered housing market has generated positive headlines this year, with existing home sales posting their highest reading in 3 years in December!

When cyclical growth accelerates and inflation moderates, it creates what we refer to in the business as a “target rich environment.” Simply put, a large number or REIT property sectors that have not performed well since 2021, could begin to prosper in a healthier economy. Lodging REITs, Apartment REITs, Mall REITs, and Self-Storage REITs all have large cyclical components to their cash flows, and an accelerating economy could push these REITs much higher in 2026.

This would make REIT performance much broader than in the last few years, opening a myriad of doors to new REIT opportunities.

While investors aren’t buying it yet, it may only be a matter of time before cyclical REITs start posting un-ignorable results. And when that happens REITs might feel the need…

The need for speed.

PERFORMANCE: +2.16% in January, +12.4% TTM

Serenity Alternative Investments Fund I returned +2.16% in January net of fees and expenses with +98% net exposure versus the MSCI US REIT Index which returned +3.07%. On a TTM basis, the fund has returned +12.4% versus +5.0% for the REIT index, and over the past 5 years Serenity Alternatives Fund I has returned +10.6% annually, net of fees and expenses versus +7.2% for the REIT index.

The most profitable position in the fund in January was Iron Mountain (IRM), a long position which returned +11.07%. Iron Mountain continues to be a fund favorite, despite misleading short reports and a lack-luster 2025 in the company’s Data Center business. We believe investors are missing some of the key positives that could be in store for IRM in 2026, such as a large increase in free-cash flow, accelerating Data Center leasing, and continued strength in the services business. With AFFO growing consistently at +10% per year, and a REIT average multiple, we like the growth/value combination IRM offers. Serenity remains long.  

The worst performing position in the fund in January was Kilroy Realty (KRC), a long position which returned -7.73% during the month. Kilroy is an Office REIT with assets concentrated in San Francisco. We bought Kilroy at a very attractive price in 2025 during the tariff induced market selloff, and the stock has performed incredibly well ever since. As San Francisco office leasing continues to gain momentum, we remain long Kilroy, as it sports one of the highest quality Office portfolios in the market, and an excellent management team.

GROWTH ACCELERATING: January ISM data skyrockets

Despite the seemingly unending cadence of negative news stories, the January ISM Manufacturing survey just put a significant dent in the bear case for the US economy. A reading of +52.6 for the headline number was the highest since 2022, and a whopping +4.7-point increase from December’s reading. To put this into context, since November of 2022, the ISM headline reading has been above 50 precisely 2 times, out of the last 39 months.

The components of the report were favorable as well, with new orders jumping to +57.1, also their highest reading since 2022 and a massive move from +47 the month before. The chart below illustrates the magnitude of this month’s move, which is a clear break higher after 3 years of languishing below or near the 50 mark.

For the REIT market this has very straightforward implications. Accelerating growth (the ISM survey is traditionally one of the strongest forward indicators of GDP growth) would be good for cyclical REIT sectors that have languished since 2021. Lodging, Apartments, Self-Storage, and even Mall and Office REITs could benefit from a cyclical acceleration in the economy.

As we have been writing over the past few months, cyclical REITs are very cheap because their fundamentals have been very…bleh. Just like the ISM report, until this month. If cyclical REITs can capture any kind of similar pop in underlying demand…look out above.

The Bottom Line: The January ISM manufacturing survey just posted its best results since 2022. As a leading indicator of cyclical economic activity, this could bode well for cyclical REIT sectors (Apartments, Lodging, Self-Storage, Malls). With a plethora of cheap REITs within this broader cyclical complex, Serenity could see a very broad set of REIT targets in 2026.

INFLATION COOLING: Shelter inflation continues to moderate

In another layer of positive news, the shelter component of inflation (1/3 of total CPI), continues to moderate from the artificially high levels of the past two years. At +3.8%, shelter inflation remains higher than either Apartment rent growth or house price growth (both of which shelter inflation is meant to proxy). It continues to move lower, however, down from +4.8% in 2024 and +5.8% in 2023. As this value converges with more realistic measures of housing inflation, it places continued downward pressure on headline CPI.

The chart below illustrates the lagging nature of shelter inflation (OER, owners equivalent rent) and its relation to Apartment revenue growth, Self-Storage revenue growth, and home prices. Long-story short, OER remains elevated, despite little confirming evidence from real data reported by landlords and homeowners.

The readthrough to the REIT market here is that inflation is likely to continue cooling in 2026. All else equal this should relieve some pressure on bond yields and make high durations REITs more attractive. The Net Lease sector (also referred to as Free-Standing Retail) likely stands to benefit the most as it tends to carry the highest duration (correlation with the bond market) of all the REIT property types. Healthcare REITs could also benefit, and the REIT industry as a whole tends to perform well when bond yields fall.

The Bottom Line: As shelter inflation continues to moderate, headline CPI is likely to continue to move lower in the coming months. This could pull bond yields lower, which would be an additional tailwind for the REIT space, and Net Lease REITs in particular.

HOUSING RAMPING: Existing home sales pop in December

One of the unexpected surprises of 2026 so far has been an interesting pop in some housing market indicators. Existing home sales surprised to the upside in December, suggesting a small surge into the end of 2025. Couple this with the fact that mortgage rates have fallen almost 80 bps (0.8%) over the last year, and suddenly the outlook for the housing market is starting to look much more interesting.

Remember, demand for existing homes had basically fallen to 30-year lows in 2023/2024. The chart below shows home purchase applications going back to 1992 and clearly illustrates how locked up the housing market had gotten. But as time passes, fewer Americans are locked into their homes by low mortgage rates, and activity levels are beginning to normalize. Just in the past 6 months, MBA mortgage apps are up +25%.

From a REIT perspective, this is uniquely impactful for the Self-Storage REITs. Self-Storage as a business benefits primarily from activity. This includes moving, and more people buying and selling homes tends to drive up demand for Self-Storage. The performance of the Self-Storage REITs so far in 2026 (+7%) reflects the fact that investors may be warming up to a normalizing housing market.

There is also a positive read-through for the home brokerage businesses, of which, Compass Inc (COMP), has recently moved towards the top of the Serenity “CORE” model. More housing activity directly translates into higher earnings for Compass, so as the market improves, Serenity is likely to become more bullish on Compass and its peers.

The Bottom Line: A more normal housing market would be good for the overall economy and for Self-Storage REITs. With mortgage rates in the low 6’s (from 7% a year ago), housing activity has begun to improve. There is still a long way to go, but Serenity has multiple ways to play increased transaction volume in housing.  

PERMISSION TO BUZZ THE TOWER

2026 is already a much different year than 2025. Sectors of the stock market that have lagged the tech space in recent years have begun to perk up. Manufacturing activity just saw its largest bump since 2021, and a wide variety of REITs are poised to outperform if cyclical growth accelerates.

For a REIT manager, this is a good position to be in. Our opportunity set is broadening, and 2026 holds the potential for a robust acceleration in REIT cash flows.

Let’s turn and burn!

Martin D Kollmorgen, CFA

CEO and Chief Investment Officer

Serenity Alternative Investments

MdKollmorgen@SerenityAlts.com

*All charts generated using data from Bloomberg LP, S&P Global, and Serenity Alternative Investments

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