Market Commentary

REITs delivered solid gains in operating results in 2015:Q4. Funds From Operations (FFO) of All Listed U.S. Equity REITs rose nearly 10% from a year ago, to $12.2 billion, and Net Operating Income (NOI) increased 13.2% over this period. Dividends paid by All Listed U.S. Equity REITs and Mortgage REITs increased 5.1% over 2014:Q4. Total dividends paid for the year as a whole increased to nearly $45 billion.

Investment real estate values grew by +0.44% percent during February 2016 according to the FTSE NAREIT PureProperty® Index Series, which provides the earliest measurement of changes in the market values of properties held for investment purposes. 

Strong and growing demand for commercial real estate in 2015 carried into the new year. Commercial property transactions totaled $139 billion in January, up 15.3% over January 2015. Indeed, the CRE market appears to have gained momentum recently, as total sales over the past three months were 22.2% above the prior three months.

The outlook for REITs and commercial real estate depends critically on sustained improvements in economic fundamentals. What are the risks that a recession is on the horizon?

The total return on listed Equity REITs since stock market volatility spiked higher last August is 500 bps higher than the total return on the S&P 500. Moreover, REITs performed better than seven of the 10 headline Sectors according to the S&P/MSCI Global Industry Classification System (GICS®)

Economic fundamentals for REITs and real estate continue to improve. GDP growth slowed in late 2015, but mainly reflecting a decline in energy exploration and in export markets; domestic sectors supporting real estate remain firm. 

The outlook for equity REITs’ operating performance in 2016 depends in many ways on the impact of rising interest rates. How much will higher interest payments affect earnings? How solid are REIT balance sheet positions? Will higher short-term rates cause any difficulties covering interest payments?

Anybody could be forgiven for having the impression that 2015 was a bad year for REIT investors.  It was full of headlines about the impending increase in interest rates, and equally full of speculation that the Fed’s action would spell trouble for real estate. But REITs—especially the market-dominating equity REITs—outperformed during 2015.  Does that surprise you?  It shouldn’t:

Total nonfarm employment rose 211,000 in November, following an upward-revised increase of 298,000 in October, showing a strengthening economy heading towards the end of the year. Labor market slack is much diminished from two or three years ago, with the unemployment rate unchanged at 5%.