04/01/2014 | by Sarah Borchersen-Keto

Returns on equity REITs far outpaced gains seen in the broader market during the first quarter of 2014, and analysts expect solid fundamentals to continue to support the sector.

Total returns for the FTSE NAREIT Equity REITs Index gained just under 10 percent in the first quarter, compared with the 1.8 percent gain seen in the S&P 500 Index in the same period. Gains for the FTSE NAREIT All REITs Index stood at 8.6 percent in the first quarter.

REIT returns softened in March compared with the first two months of the year.

Total returns from the FTSE NAREIT All REIT Index gained just 0.3 percent in March, compared with a gain of 0.8 percent for the S&P 500 Index.

“We’ve had good momentum in the stock pricing and we’re just taking a normal pause,” said Mike Salinsky, director at RBC Capital Markets. “Fundamentals continue to hold up in the space.”

He noted that REITs felt the impact of a slight pick-up in the 10-year Treasury note yield during March after yields had pulled back in February. Yields on the 10-year Treasury rose 0.1 percent in March after they were flat in the previous month.

Ashtyn Evans, REIT analyst with Edward Jones, observed that the REIT market fluctuated in March around changing expectations for interest rates. She noted that the market paid particular attention to comments from Federal Reserve Board Chairman Janet Yellen indicating that the Fed could start raising short-term interest rates early next year.

Looking ahead, observers appear that fundamentals in the market will hold up. A report from the Urban Land Institute (ULI) and EY released April 1 highlighted the gradual improvement in both the economy and real estate market fundamentals.

“Fundamentals beyond multifamily continue to improve with the retail sector now joining in. This overall outlook for real estate is supported by expected ongoing improvements in the economy,” said Anita Kramer, vice president of the ULI Center for Capital Markets and Real Estate.      

“Fundamentals are solid right now. We’re seeing stronger balance sheets, which will enable REITs to grow through acquisitions, development and increase their dividend,” Evans said.

Evans stressed that supply is generally low across all property types, which should support rent growth. Salinsky agreed that, with the exception of the apartment sector, “we’re not seeing much supply in any of the sectors.”

During the first quarter of 2014, total returns for residential REITs gained 13.7 percent, while gains for self-storage REITs totaled 13.1 percent. Gains in the industrial and office sectors both stood above 11 percent through the first three months of the year.