Last week’s payroll numbers came in at 142k versus the street wide estimate of 165k along with downward revisions to June and July numbers, while unemployment numbers partially offset this miss with a decline to 4.2% from 4.3%. These “smallish” changes to the payroll and unemployment numbers may have reduced the need for a knee jerk 50bp rate change response, and it may be more likely we would see a 25bp in September along with 100bp total reduction by year-end. Shorting REITs has been a roller coaster ride over the last several years along with the volatility we have seen in U.S. interest rates over that time period. The largest REIT shorts are:

Real Estate Investment Trusts (REITs) perform better in lower interest rate environments as the value of their assets increase during times of economic prosperity and both short-term and long-term financing expenses take a smaller bite out of their revenue streams.

REIT short sellers were up +$4.4 billion in 2020 year-to-date mark-to-market profits, +13.4% but gave most of those profits back in 2021 when they were down -$3.2 billion in year-to-date mark-to-market losses, -7.7%. In 2022, with interest rates rising, REIT short sellers were up +$11.5 billion in mark-to-market profits, +31.2%.

In 2023 rates trended upwards in the beginning of the year and are beginning to trend downwards. REIT short sellers paid the price the early year surge in interest rates with year-to-date mark-to-market losses of -$2.4 billion, -7.9%. But this has been a tale of two different halves for the year as the Dow Jones Equity REIT Total Return Index was down -2.2% from January through June but up +13.2% from July through September. REIT short sellers were up $1.1 billion, +3.8%, from January through June but from July to the present short sellers are down -$3.5 billion in mark-to-market losses, -11.0%.

For the year, REIT short interest increased by $2.5 billion which was made up of $5 million of new short covering more than offset by a $2.5 billion increase in the mark-to-market value of the shares shorted. But by just looking at the year-to-date change in short interest we would be lulled into thinking that there was not much short side activity in the REIT sector when in reality there was a significant flip-flop of sentiment.

From January through June 2024, we had $1.9 billion of new short selling partially offset by a -$1.6 billion decrease in the mark-to-market decline in the value of shares shorted. Shorts were backing up their bets in a winning trade. But as Interest rates are teetering on the verge of a series of rate cuts by the Federal Reserve, we have seen a complete reversal of REIT short seller sentiment with $1.9 billion of short covering more than offset by a $4.1 billion increase in the mark-to-market value of shares shorted In July through September. REIT short sellers are actively trimming their exposure in a trade that is reversing and becoming unprofitable.

Expect more short covering in the REIT sector with short seller buy-to-cover activity shoulder to shoulder with long buying and driving REIT share prices up. The REIT sector, along with other financial sectors, are very interest rate sensitive and stock prices will inversely reflect interest rate moves. We have seen $1.9 billion of REIT short covering from June through September, short seller buy-to-covers should accelerate as the Federal Reserve actually lowers rates. The REIT rally should continue, with short sellers greasing the skids for long buyers rotating into this sector in size.

Our Blacklight SaaS platform and Black App provides an up-to-date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions. The Black MaP and Black App products provide a total view of long and short positioning in the market with a breakdown between Active\Passive long investors, 24 Fund type entities, over 50k securities globally across 108 countries and data from 58 regulatory exchanges.