REITs' September Stumble Not Indicative of Trend
10/02/2012 | by Matthew Bechard

REITs lagged behind the broader stock market in September and were down 0.89 percent, while the S&P was up 2.58 percent.

Brad Case, NAREIT's senior vice president of research and industry information, said the September decline doesn't deter from the story surrounding the current REIT bull market.

"What investors have to keep in mind, while we look at the last three REIT bull market periods, is that in each case REIT returns have averaged more than 20 percent per year," Case explained in a video interview with REIT.com. "What we've seen historically is that REITs have had one down month for every two up months, so it's very normal to have negative months in a bull market."

Case added that the REIT market had a two year downturn before, and is now three-and-a-half years into the current bull market. He pointed out that investors have a lot of good news ahead of them.

"The fact that they have an occasional down month should not really take their eyes off the long-term prize," he said.

While investors are uncertain whether or not the overall U.S. economic expansion will continue or if there will be more challenges ahead, including another recession, Case doesn't think there will be many more significant bumps in the road. He anticipates a slow but steady improvement in the overall economy.

Case added that investors are focusing their attention on what part of the economy is going to benefit immediately from an economic upturn, and what part will benefit later.

"My own approach is to take a broad view of the economy and make sure I have exposure to the major asset classes, real estate being a very important piece of that. I think over the next few years you're likely to see growth in all parts of the economy," he said.

While REIT stocks were down as a whole, mortgage REITs fared much better in September, according to Case. He noted that two things are driving that sector's success.

"One is that mortgage REITs were hit very hard during the liquidity crisis, and the mortgage sector, especially the commercial mortgage REIT sector, is now really coming out of that crisis," he said. "The other factor is that the general sense among investors is that mortgage REITs are going to play a very important role in providing financing for both commercial and residential properties.

Looking at equity REIT sectors, timber REITs were the top-performing sector and multifamily was the lowest in September, as investors made assumptions about what potential new housing starts could mean to those sectors. However, Case said that while evidence supports an increase in housing construction, investors are overreacting in their thinking that the housing recovery will impact growth in the apartment sector, as there is still a gap of some 4 million units in terms of demand for rental space and current supply.