Aggregate Investment, Economic Dynamics, and Predictability In the REIT Market

This paper investigates whether aggregate investment predicts future market returns in the U.S. equity REIT sector. During more than half a century from 1972 to 2023 encompassing both vintage and new REIT eras, we find that a one-standard-deviation increase in aggregate investment, measured as value-weighted annual operating asset growth, signals an approximate 5.6% lower expected annual excess REIT market return. This predictability is robust to extensive controls, including valuation ratios, interest rates, other corporate policies, and investor sentiment. Further analysis supports a primary role for time-varying risk premia, showing that aggregate investment covaries negatively with economic uncertainty and predicts future economic growth dynamics in a hump-shaped pattern. While sentiment effects are present, they appear secondary, and the predictability is mainly driven by debt-financed investment. Our findings validate the investment-CAPM framework for REITs and identify aggregate investment as a robust predictor of REIT market dynamics.