REIT returns reversed a four-month downward trend in December as concerns about rising interest rates eased, market watchers said.
The FTSE/NAREIT All REIT Index had a total return of 4.2 percent in December, while the S&P 500 index return was 2.0 percent. Total returns of the FTSE/NAREIT All Equity Index were 4.5 percent in December, while total returns of the FTSE NAREIT Mortgage REITs Index were 0.7 percent.
The FTSE/NAREIT All REIT Index posted a total return of 9.3 percent for the entire year, while the S&P 500 saw a total return of 12 percent. The yield on the 10-year Treasury note was 0.1 percentage points in December and 0.2 percentage points for the year as a whole. Returns for the FTSE/NAREIT All Equity Index were 8.6 percent for the year, while returns for the FTSE NAREIT Mortgage REITs Index totaled 22.9 percent in the same period.
“The election’s out of the way. We now know pretty much what the [Federal Reserve] is going to do. What we saw toward the end of the year was a little bit of decoupling between interest rates and REIT stock prices,” said Roy Shepard, senior analyst at Edward Jones.
Shepard said that recent REIT performance could signal that in 2017 investors will pay more attention to earnings and dividend growth, rather than maintaining the “hyper focus” on interest rates that has been seen in the last three years.
David Kessler, the national director of the commercial real estate industry practice at CohnReznick, commented that “overall, 2016 was another strong year for U.S. commercial real estate markets despite some forecasts claiming the bubble would burst, and we have reason for continued optimism in 2017.”
Kessler added that the commercial real estate market is not over-leveraged, and “fundamentals are stronger.” He noted that interest rates “will inevitably rise, but the industry as a whole seems well-poised to absorb any adverse impact.”
Matthew Werner, portfolio manager at Chilton Capital Management, said the recovery in REIT prices in December came in the wake of a relative stabilization in interest rates. Prices could also have been helped by interest from longer-term investors who saw good buying opportunities in the sector, rather than short-term investors “playing the interest rate game,” he observed.
Looking ahead, Shepard said he will be closely watching trends in new construction, given that “we’re getting late in the cycle.”
Turning to individual property sectors, industrial REITs outperformed the rest of the industry, posting total returns of 30.7 percent for 2016. Returns for single-family home REITs stood at 26.7 percent for the year, while data center REIT returns came in at 26.4 percent. Lodging REITs were up 24.3 percent in 2016.