Market Commentary

Excessive debt growth is a warning sign of an overheating real estate sector. Growth of commercial mortgage debt has been modest, however, at only half the pace of the prior cycle. Banks have been the mainstay of lending, but life insurers have shown increased appetite for commercial mortgages, and net issuance of CMBS turned positive in the second quarter. 

Investments from listed property companies in emerging markets have been especially strong over the past year, according to the FTSE EPRA/NAREIT Global Real Estate Index Series.  Over longer historical periods, however, risk-adjusted returns from listed U.S. equity REITs have outpaced those from listed real estate in both emerging markets and non-U.S. developed markets.

Vacancy rates are likely to remain low as adult members of shared households eventually strike out on their own. However, that the process may take longer than anticipated. 

The current bull market for exchange-listed equity REITs has rewarded investors with returns averaging more than 21% per year over the past 8½ years—but by the standards of previous real estate market cycles this one has not even hit its stride yet.

REITs and other owners of commercial properties are likely to benefit from a favorable balance of supply and demand in the months ahead.

 An increase in interest rates might be cause for concern if it were predicted to come with no accompanying increase in net operating income—but it’s those changes in net operating income, not the interest rates themselves, that should attract the closest attention of investors in any equity asset such as real estate.

There’s little difference between the income earned by the largest, most sophisticated investors in private equity real estate and the income earned by the smallest individual investors in listed equity REITs. 

Mortgage REITs are an investment in real estate finance that combine high current income with long-term total return and portfolio diversification. MREITs have delivered a 21.2 percent total return over the past year, outpacing most other investments over this period.

Listed equity REITs have generally outperformed small-cap value stocks, posting slightly higher returns but substantially lower volatility and substantially better diversification benefits.

Single Family Home Rental REITs have established themselves as long-term players providing additional housing options at a time when the housing market continues to recover. 

Cambridge Associates reports that private equity real estate funds have underperformed listed equity REITs by 3.91 percentage points per year over the past 25 years.

The listed REIT industry continues to grow and prosper. Total Funds from Operations (FFO) of listed Equity REITs rose 7.9 percent in the second quarter, to $15.6 billion, according to the NAREIT T-Tracker®.