REITs Bounce Back in March

REITs posted a strong upswing in March, outpacing broader market gains as investor concerns about global macroeconomic issues eased during the month, according to market observers.

The total returns of the FTSE/NAREIT All REIT Index rose 10 percent in March, while the S&P 500 Index added 6.8 percent. For the year to April 1, the total returns of the FTSE/NAREIT All REIT Index are 5.9 percent, while the S&P 500 Index is 2.0 percent higher. The yield on the 10-year Treasury note is 0.5 percent lower for the year to April 1.

“People had a chance to take a deeper breath in March and realize the world’s not coming to an end,” said Alexander Goldfarb, a managing director at Sandler O’Neill & Partners.

David Toti, managing director and senior equity research analyst in the real estate group of BB&T Capital Markets, noted that “there’s a little bit less fear in the market today, although the question marks are still there.”

Matt Werner, portfolio manager at Chilton Capital Management, said comments from Federal Reserve Chairman Janet Yellen on the timing of further interest rate hikes this year also put the market at ease. Additional factors supporting REITs in March included a strong earnings season and an abundance of 2016 guidance raises issued by REIT management boards, according to Werner.

Meanwhile, Goldfarb pointed out that bond yields remain “stubbornly low; people realize that they need growth and income, and that’s been helpful for REITs.”

Looking forward, Toti said he expects market volatility will continue, although it should lessen in severity as investors begin to “more accurately underwrite what they think 2016 is going to look like.”

Goldfarb stressed that while the search for yield and total return remain priorities for investors, “the market gets spooked easily.”

Turning to specific REIT segments, returns for free-standing retail REITs were 18.4 percent for the year to April 1, while returns for data center REITs were 14.7 percent in the same period. Self-storage REIT returns gained 10.7 percent in the year to April 1.

“Self-storage is both best-in-class growth and remarkably defensive, so investors have flocked to that space,” Toti said.  Data centers have also been “remarkable” performers, he added. Because demand for REIT data center stocks comes from both REIT investors and technology investors, “it’s a sector that’s experiencing exponential and immeasurable demand,” Toti said.

Werner said his long-term view for the REIT sector remains positive.

“When you’re looking at the properties that REITs own, they are all humming along just great. There’s really no sign of over-building. This cycle really seems like it’s built for a nice, long upward trajectory,” Werner said.