Starting from REIT Bottom: -1.6% in July, +5.9% LTM

“Started from the bottom now we’re here” – Drake

• PERFORMANCE: Serenity Alternative Investments Fund I returned -1.6% net of fees in July vs the REIT index at -0.79%. Over the last twelve months (LTM), the fund has returned +5.9%.

• REITS AT THE BOTTOM? Apartment REIT revenue growth could accelerate into 2026, potentially catalyzing a broader REIT bull market.

• NOW WE’RE HERE: What could a REIT bull market mean for portfolios three years from now?

REITs done kept it real from the jump,

People worried bout inflation REITs are sideways every month,

REITs are trying to get it on their own,

Need a little help maybe a rate cut from Jerome.

REITs are starting from the bottom in 2025. Growth is well below average, valuations are attractive, and investor sentiment remains decidedly pessimistic. Absent a recession, it would be hard to see things getting worse for many REIT property types.

But as the CEO of Prologis described it on their most recent earnings conference call…water is building behind the dam. Supply pressures are fading, REIT tenants are beginning to become more active, and the case for rate cuts is building.

Could the REIT industry be poised to accelerate off the bottom in 2026?

We learned during the Q2 earnings season that tariff uncertainty, and high interest rates continue to hamper demand from commercial real estate tenants. With tariffs becoming clearer every week, could a Fed rate cut or two re-catalyze demand in the broader economy?

If so, REITs are cheap with multiple identifiable catalysts.

And remember, typical REIT bull markets return +15-20% annually over 5-year periods.

I just think it’s funny how it goes,

With a rate cut you should have REITs in your portfolio…

PERFORMANCE: -1.6% in July, +5.9% LTM

Serenity Alternative Investments Fund I returned -1.6% in July net of fees and expenses with +97% net exposure versus the MSCI US REIT Index which returned -0.79%. Year to date the fund has returned +1.7% versus -0.87% for the REIT index. On a last twelve-month (LTM) basis, the fund has returned +5.9% vs +1.7% for the REIT index. Over the past 5 years Serenity Alternatives Fund I has returned +11.7% annually, net of fees and expenses versus +7.6% for the REIT index.

The most profitable position in the fund in July was American Healthcare REIT (AHR), a long position which returned +5.17% for the month. AHR remains one of the fund’s top holdings and best ideas. As a quick reminder, AHR owns a portfolio of Seniors Housing campuses and is positioned perfectly to absorb the accelerating demand the baby boomers are generating for Seniors Housing. Year to date, AHR is up +38%, beat and raised their guidance in Q2, and continues to prove our thesis that it would be one of the top growth names in REITs in 2025.

The worst performing position in the fund in July was JBG Smith Properties (JBGS), a short position which returned +22.4% during the month. JBGS is an Office REIT with a portfolio focused in and around Washington DC. In their second quarter earnings release, JBGS announced that they had sold multiple multi-family assets and were using some of the proceeds to buy back shares. While this is a shareholder friendly move, and we applaud the management team for it, in our view it does not justify a +22% move higher in the stock. We believe the combination of high short interest and a positive catalyst in the name potentially caused a mini short squeeze in the name in July. We remain short, as JBGS still has significant exposure to the DC office market, and is now one of the most expensive REITs in the Office sub-sector.

STARTED FROM THE BOTTOM: When will REIT fundamentals recover?

At Serenity we consider the Apartment REITs as a bellwether sector within the broader REIT industry. Apartments are one of the most actively transacted property types in commercial real estate, and we can track Apartment fundamentals very closely thanks to multiple rent tracking data aggregators. Apartments also tend to be cyclical, acting as an excellent barometer of economic strength.

The chart above shows the history of same-store revenue growth for the Apartment REITs going back to 2004. Currently, Apartment REITs are growing their revenue at +1.6% year over year, well below the long-term average value of +3.8%. What stands out from this chart is that current levels of Apartment rent growth are lower than basically any time in the last 20 years outside of recessions.  

This can be explained by the massive supply wave that hit the Apartment market between 2022 and 2025. Put simply, when rents spiked to +12% YoY in late 2021, everyone with available capital seemingly bought land and began building an Apartment building. In 2024, these buildings were finished, delivering the largest Apartment supply wave since the 1970’s.

In 2025, the Apartment REITs are still dealing with this glut of supply. But every day, every week, every month, and every quarter this headwind subsides, as more units get absorbed, with few deliveries remaining in the pipeline.

By the time we get to 2026 (which is only 4 months away), Apartment landlords will be operating in a much more normal environment (much less competitive supply). For this reason, the likely direction of SS revenue growth for these companies over the next twelve months is higher.

Now you might think that investors would look through this period of weakness and buy Apartment REITs based on expected 2026 rent strength. But in fact, the exact opposite has occurred in August of 2025. Apartment REITs have traded to significant discounts, reflecting continued 2025 rent weakness, as opposed to anticipating 2026 rent growth. The chart below shows Apartment REIT NAVs (Net Asset Values) and the company stock prices. Apartment REITs currently trade at a -15% discount to NAV, well below the “take-out” value of their underlying real estate portfolios.

This is a historically wide discount, at a time when there is very little downside (outside of a recession) to Apartment REIT rent growth. Said another way, unless the economy gets significantly worse over the next six months, Apartment rent growth is highly likely to bottom and accelerate higher, precisely at a time when these companies are historically under-valued. From Serenity’s perspective, this is an opportunity to put capital to work with a very favorable risk/reward outlook.

The Bottom Line: Apartment REIT revenue growth has slowed to +1.6% YoY, reflecting the impact of competitive supply that has been introduced over the past few years. At Serenity, however, we expect growth for these companies to accelerate into 2026 as supply pressures fade. With Apartment REITs trading at a -15% discount to NAV, our view seems to be out of consensus. Within the Serenity process, this looks like a great opportunity.

NOW WE’RE HERE: What an Apartment led bull-run could look like for REITs…

The reason Apartment REIT acceleration is so important is that as we mentioned earlier, Apartment REITs tend to be a bellwether for the broader REIT industry. If Apartment fundamentals are improving, it’s highly likely that fundamentals are also improving for Lodging REITs, Self-Storage REITs, Retail REITs, and Warehouse REITs.

We can take the 2009-2014 REIT bull market as a good example. In the wake of the great financial crisis, Apartment REITs led a broader commercial real estate recovery, returning +18.7% annually from 2010-2015, with the REIT index slightly lagging at +17.05%.  

Remember, those are annualized returns over a 5-year period, and during that bull market investors doubled their money TWICE in the first 3.38 years.

Now, we are not emerging from a GFC like catastrophe, but we could see Apartment rents accelerate like they did from 2004-2007. During that period Apartment REIT rent growth went from below +1% to +6%, and Apartment REITs returned +30% annually from 2004-2007. REITs over that same period returned +20.8%.

Now historical comparisons are always fraught with risk, but the overall pattern here is clear. When Apartment rents accelerate higher, it tends to drive extremely strong performance in the Apartment REITs, and the broader REIT market.

The Bottom Line: If Apartment REITs enter a sustainable bull market, there is historical precedence for the sub-sector to generate annual total returns well into the double digits over multiple years. These periods tend to coincide with growth accelerations in other property types, diving broad REIT bull markets. By the year 2028, we could very easily look back on 2025 and say…started from the bottom now were here.

NOW I’M ON THE ROAD, HALF A MILLION FOR A SHOW

Just like Drake, REITs have a history of delivering huge hits, but their popularity inexorably goes in waves. If we take a cold, calculated, analytical attitude towards the space, history indicates that the best time to buy REITs is when fundamentals are bottoming and about to accelerate.

With REITs, you want to start from the bottom. In Apartment REITs, there is a high probability that revenue growth bottoms in late 2025 and accelerates higher in 2026.

As usual, for more information don’t hesitate to reach out.

I wear every single chain, even when I’m in the house,

Martin D Kollmorgen, CFA

CEO and Chief Investment Officer

Serenity Alternative Investments

Office: (630) 730-5745

MdKollmorgen@SerenityAlts.com

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

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