While U.S. REITs posted gains of 4.29 percent in January, according to data from the FTSE NAREIT U.S. REIT Index, they trailed the S&P 500, which had total returns of 6.24 percent for the month.
Brad Case, NAREIT’s senior vice president of research and industry information, noted that some investors subscribe to the notion that what happens in January predicts the rest of the year. However, despite trailing the broader market, REITs still offer investors plenty of reasons to be optimistic, he said. Notably, rents and occupancies should continue to grow across all property types as the economic recovery picks up steam, according to Case.
“We’re still in the early phases of what is, generally speaking, a long real estate market cycle,” Case said.
Uncertainty continues to plague the market, according to Andrew Goldfarb, managing director and senior REIT analyst with Sandler O’Neil and Partners L.P. In particular, the political situation in the nation’s capital is creating headaches for investors, he said.
“There are so many unknowns emanating from Washington that I think it’s probably pretty difficult to predict what may or may not happen based on historical patterns, because these four years have been nothing like what we’ve had historically,” he said. “We never had anything, at least not in the modern time, where Washington was so involved in every facet of the economy.”
Industrial REITs Off to a Strong Start
Industrial REITs took the lead as the top performers among U.S. REITs in January. The sector posted total returns of 8.95 percent, followed by timber REITs, which were up 7.55 percent, and lodging, which climbed 7.29 percent.
Goldfarb attributed the industrial sector’s positive January run to investors’ expectations of an improving economy. In the case of the timber sector, Case said timber REITs have outperformed for months as new construction has increased, including residential construction.
In general, Case said REITs are benefitting from their relatively easy access to the capital markets.
“The other driver of outperformance is that REITs have such good access to capital and are able to use that to make good acquisitions,” Case said.
The apartment sector continued to lag behind the REIT market, as the sector was down 1.53 percent in January. The apartment sector was up 2.26 percent in 2012 while all equity REITs were up 16.66 percent, according to the FTSE NAREIT U.S. REIT Index,. Goldfarb pointed out that apartment REITs’ guidance for upcoming earnings fell short of expectations, weighing on the sector.