U.S. REITs outperformed the broader stock market in 2012, and industry analysts say they expect REIT returns to remain competitive in 2013.
Equity REITs had a 20 percent total return, while the S&P gained 16 percent. REITs have outperformed the broader market outperformed in every year since 2008.
Paula Poskon, senior equity research analyst at Robert W. Baird & Co., said some of the volatility in the REIT market in 2012 was directly related to macroeconomic factors.
“When people got more upbeat about the economy, we saw the more cyclical sectors take off and the defensive sectors lag.”
Brad Case, NAREIT’s senior vice president of research and industry information, said he anticipates that REITs will benefit from job growth, economic growth, higher occupancy rates and rental growth in 2013. Case also said REITs should have an advantage with a lower cost of capital when bidding for properties up for sale.
Poskon identified a handful of major themes that she expects to affect the commercial real estate market in 2013.
“"So long as we continue to have weak economic growth and low interest rates, driven by persistent uncertainty from Washington, I expect REITs will continue to do well," she said. “REITs that have wide open access to the public capital markets can continue to grow and develop.”
Low levels of supply bode well for the industry, she said.
Supply is “picking up, but still below historical norms,” Poskon said. “Multifamily is the only area where we’ve seen new supply. Lending for development is still constrained, and we are not seeing a lot of new shopping centers and office buildings.”
One potential area of concern for REITs: interest rates. While rates have remained low since the economy cratered in 2008, Poskon said they could start to creep back up if the pace of the economic recovery quickens in 2013.
“That would be bad for REITs,” she said.
For the year, the timber and infrastructure sectors gained the most, up 37.05 percent and 29.91 percent, respectively, according to the FTSE NAREIT U.S. Real Estate Index. Of the larger sectors, industrial REITs led the pack, reporting total returns of 31.28 percent. The retail sectors was second at 26.74 percent.