REITs Advance in October on Encouraging Earnings

REITs posted gains in October, supported by positive third quarter earnings reports and the Federal Reserve’s decision to keep interest rates unchanged, according to market watchers.

The total returns of the FTSE/NAREIT All REIT Index rose 6.1 percent in October, while the S&P 500 Index gained 8.4 percent. The yield on the 10-year Treasury note was up 0.1 percent for the month. Through the end of October, REIT total returns for 2015 were up 1.3 percent, while the S&P 500 Index was up 2.7 percent.

Jeff Langbaum, senior REIT analyst at Bloomberg Intelligence, said much of the REIT market’s performance this year has been marked by volatility, and he expects this to be the case for the remainder of 2015. As investors wait for fourth quarter and year-end results to be released in early 2016, macroeconomic factors will exert more weight on the market, Langbaum said: “It could be a bumpy ride.”

Matt Werner, portfolio manager and analyst at Chilton Capital Management, also said he expects REIT volatility to persist until there is greater clarity on interest rates.

Meanwhile, analysts said third quarter earnings reports and future earnings guidance have largely been upbeat. Werner observed that positive spreads on new leases exist across most sectors in all markets. Occupancy is still at cyclical highs and increasing, with very little new construction to offset that trend, he added.

“CEO’s are certainly upbeat on their current situation, and I think we’re getting more clarity on how upbeat they are looking out over the next year as well,” Werner said.

Analysts Still See Strong West Coast Fundamentals

Almost all REIT sectors had positive returns for the month.

Office REITs posted returns of 7.4 percent in October. Langbaum pointed out that during the month, suburban office REITs outperformed their counterparts with exposure to San Francisco and the technology sector. Despite concerns about a downturn in venture capital funding and the weak IPO market for technology companies, Langbaum stressed that REITs continue to see significant demand and a lack of new supply in their West Coast markets.

Werner added that job growth is still “excellent” on the West Coast, while new demand is well exceeding supply across all property types. “Pre-lease numbers for new development are extremely high,” he added.