The sector, which was one of the biggest beneficiaries of easing rates in the fourth quarter, is highly sensitive to broader developments in the economy and markets. So with traders reducing wagers on a rate cut at the Federal Reserve's March meeting and the yield on 10-year Treasuries rising to 4.11%, the highest since Dec. 12, real estate is primed to take a hit.

"We think that there will be payback from the strong Q4 rally as we approach the Fed meeting at the end of the month," said Joe Gilbert, portfolio manager at Integrity Asset Management, LLC. "Generally, all real estate stocks will suffer but we are more cautious on the office REITs." 

Of course, in the broader picture, real estate stocks are just giving back some of their gains after a strong fourth-quarter rally sent a gauge of the sector soaring to its best quarter since 2009. The gauge sank 1.9% Wednesday and is down 3.7% since the start of the year, making it the third worst group in the S&P 500. 

Real estate stocks struggled to regain stability for much of 2023 as the shift to remote work, panic around commercial real estate and the regional banking crisis weighed on the sector. Investors are now ditching shares, with an office REIT index heading for its worst week since November.

"Overall office fundamentals have clearly been poor and 2024 may get worse in terms of supply, demand, occupancy and rent," Truist Securities analysts led by Ki Bin Kim wrote in a note to clients. "We still believe some stocks are undervalued, but there needs to be a catalyst to interest investors and reprice the stocks," they added, pointing to SL Green Realty Corp. and Vornado Realty Trust as examples. 

"What's notable is many of these areas, including REITs, are back to where they traded on Dec. 13 – the last FOMC meeting and press conference, which was perceived as more dovish," said Keith Lerner, chief market strategist at Truist Advisory Services Inc. 

Meanwhile, volatility has returned to the market with the VIX, Wall Street's fear gauge, climbing above 15 for the first time since November. The US 10-year Treasury yield rose to 4.1%.

Adding to the frenzy, the latest retail sales data released Wednesday further underscored doubts about whether the market can expect a pullback in rates by March as stronger-than-expected results showed consumer resilience heading into the new year. 

"The real estate sector is prone to disappointment," said Steve Sosnick, chief strategist at Interactive Brokers. Traders should expect uncertainty to be reflected in the sector moving forward if the pace of rate cuts doesn't play out as hoped, he added.