As interest rates begin to decline, both advisors and investors are turning their attention to opportunities within the real estate sector. While residential mortgage rates have been a primary focus, commercial real estate is also poised to benefit from this shift. Particularly, actively managed funds like the Fidelity Real Estate Investment ETF (FPRO) are emerging as attractive options for those seeking to capitalize on a recovering market.
Impact of Declining Rates on Commercial Real Estate
Throughout 2024, elevated interest rates have driven 30-year mortgage rates above 7%, exerting significant pressure on the commercial real estate market. According to Lawrence Yun, Chief Economist of the National Association of REALTORS, commercial real estate transactions plummeted by 60% in 2023 compared to 2021 levels. This downturn underscores the impact of high rates on the sector.
However, as rates decline, the commercial real estate market stands to recover. Yun predicts that lower rates will contribute to greater price stability, increased lease activity, and a resurgence in transactions. This recovery presents an opportunity for investors to engage with the market during a period of improved conditions.
Fidelity Real Estate Investment ETF (FPRO) Overview
The Fidelity Real Estate Investment ETF (FPRO) is designed to capture elevated income and long-term capital growth, making it a relevant choice in a declining rate environment. Actively managed, FPRO invests in a diverse range of real estate-related companies and assets, including both domestic and international issuers. The fund’s strategy involves fundamental analysis to evaluate securities based on their financial health, industry standing, and overall market conditions.
FPRO offers diversified exposure across various real estate sub-industries, such as industrial REITs, multi-family residential REITs, data center REITs, and health care REITs. Despite being semi-transparent—disclosing only a tracking basket rather than its full portfolio—FPRO has consistently outperformed benchmarks. As of July 31, 2024, FPRO delivered total returns of 10.47% over the past year, surpassing the MSCI U.S. IMI Real Estate 25/50 Index’s 9.45% gains. Since its inception in February 2021, FPRO has achieved a total return of 5.94%, compared to the index’s 3.77%.
Investment Considerations
FPRO’s management fee is set at 0.59%, which reflects the cost of its active management and diversified approach. For investors looking to leverage the opportunities in the commercial real estate sector amidst declining interest rates, FPRO presents a compelling option.
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