Commentary - December 2024CenterSquare Real Estate Fund
Portfolio Manager Eric Rothman summarizes his thoughts on REITs and interest rates, how the Fund is currently positioned, and the growth of data centers.
What are your thoughts on REITs and interest rates?
Looking back over the past three years, the macroenvironment involving inflation and rising rates has led to an uncertain time for real estate investment trust (REIT) investors. As a result, since the beginning of 2022, when the Federal Reserve started raising interest rates, through the end of 2024, there has been a 40-percentage point gap between the performance of the FTSE Nareit All Equity REITs and the S&P 500 Indices.
We saw the macroenvironment change in the fourth quarter of 2024. From September through December 2024, the Federal Reserve cut interest rates three times and signaled additional reductions in 2025. In addition, the yield curve started to normalize, with lower rates on the short end of the curve compared to rates on the longer end. In addition, the economy remains strong, with inflation under control and the unemployment rate remaining low. These factors provide a positive backdrop for REITs going forward.
For investors who seek real estate exposure without undue risk, we are pleased that over the past 3 and 5 years ended December 31, 2024, the Cromwell CenterSquare Real Estate Fund (MRASX) is only 1 of 2 out of 182 Morningstar Real Estate Funds to rank top 30% or better in performance with an Overall “Low” or “Below Average” Risk rating.
How is the Fund positioned in this environment?
Over the past few years we had been looking to defend the portfolio against higher rates and a potential slowdown in the economy. In the Fund, we held companies that tend to be more defensive in nature such as real estate businesses in the health care industry.
Due to the normalized yield curve, potentially lower interest rates and a stronger economy, we have shifted the Fund’s portfolio to try to gain greater leverage to the economic cycle. Specifically, we have increased the Fund’s exposure to properties with shorter-duration leases and increased our exposure to sub-sectors including hotels, office and single-family residential while reducing the Fund’s underweight to apartments.
Would you please discuss the expectations for growth of data centers given the rise of artificial intelligence?
There has been a tremendous demand for data centers and power because of the growth of artificial intelligence (AI). Over the trailing 12 months through September 2024, the net absorption for data centers in the top markets in North America was 5 gigawatts, which is about 13 times more power released than in 2019, when the entire market had 360 megawatts of net absorption.
Due to the significant demand from large technology companies such as Microsoft and Amazon, space in data centers have been leased quickly. In addition, data centers are difficult to build so power has been constrained. As a result, there is very little vacancy across the market.
To potentially benefit from the demand for data centers, the Cromwell CenterSquare Real Estate Fund portfolio has a healthy exposure to data centers. As of the end of 2024, 12-13% of the portfolio was comprised of data centers including Equinix, Digital Realty, and Iron Mountain.
The performance data shown represents past performance. Past performance is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. For performance information through the most recent month end please click here.
Percentile Rankings represent a fund’s total return percentile rank relative to its Morningstar category. The highest percentile rank is 1 and the lowest is 100. It is based on Morningstar total return, which includes both income and capital gains or losses and is not adjusted for sales charges or redemption fees. MRASX ranked in the top 33%, 26% and 37% among 210, 194, and 146 Real Estate funds over the 1, 5, and 10 year periods, respectively, as of 12/31/24.
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