11/08/2018 | by Diane Rusignola

At Nareit’s REITworld: 2018 Annual Conference, three Nareit economics discussed the outlook for the REIT economy and broader market heading into 2019. The panel included John Worth, executive vice president of research and investor outreach, as moderator; Brad Case, senior vice president of research and industry information; and Calvin Schnure, senior vice president of research and economic analysis. 

“If I look at REIT dividend yield spreads to the yields on other income-oriented investments, then that provides me a signal that has no judgement on my part, but has surprising predictability power for future returns,” Case said.

In large part, that has to do with the quality of the assets REITs own, according to the panelists. 

Nareit pulled the data for the ratings of all properties owned by REITs as compared to private properties, and more than half of the REIT properties were of the highest quality grade (four and five stars, as rated by CoStar). On the other hand, only about a third of the private properties were of the same top-quality grade.

“The value of the property is more than just a quality rating,” Schnure said, referencing Nareit’s research. “We’ve merged the property quality data and the rating data with the underlying demographic characteristics of the region.”

This includes looking more closely at the average household income, the population density, and the education in the markets where REITs own properties. Schnure said the average household income around a REIT-owned mall is almost 10 percent higher than around a privately-owned mall. “Simply put, [REIT] malls have more potential shoppers with more money to spend,” he added.

While Case and Schnure each brought his own perspective to the panel, Worth said they all agreed on one thing: “Over the long term, REITs have actually performed well during periods of rising rates,” he said. “This is something that we really try to emphasize to market participants.”

Even if rates are negatively correlated with REIT returns over the short term, REITs perform well with positive returns during periods with rising rates. Thinking about causality rather than just correlation, Worth said, that makes sense that REITs would perform well when there are expectations of faster economic growth and demand is rising.

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