REITs Hold Firm in May

REITs held steady in May, as concerns over interest rate increases and uneven economic data continued to put pressure on the market.

The total returns of the FTSE/NAREIT All REIT Index slipped 0.1 percent in May, while the S&P 500 Index gained 1.3 percent. The yield on the 10-year Treasury note rose  0.1 percent for the month.

Through the end of May, total returns from the FTSE/NAREIT All REIT Index were 1.0 percent lower. The S&P 500 was up 3.2 percent during the same period.

“May was a sluggish month, with REITs slightly outpacing the S&P 500 during the first half, but then giving up gains in the second half,” observed Brad Case, NAREIT’s senior vice president for research and industry information.

First quarter earnings were “quite positive for just about all the REIT sectors, but investors seemed to shrug off that positive performance,” said Paul Adornato, managing director with BMO Capital Markets. He noted that “interest rate fears continue to pervade throughout the [REIT] group, with investors no longer talking about if, but when rates will rise.”  At the same time, the U.S. economy has been choppy, based in part on lower oil prices, he said.

Self-storage REITs were the best performing REIT sector in May, with returns up 3.7 percent in the month. The sector also leads the REIT industry on a year-to-date basis with gains of 8.2 percent.

Adornato explained that the self-storage  sector saw “surprisingly strong” first quarter results, supported by robust consumer demand and little new supply.  With occupancy at all-time highs in the sector, rent increases  are well above the rate of inflation, he added.

Manufactured home REITs also bucked the downward trend in May, with returns gaining 2.8 percent. Mortgage REITs, especially those that provide home financing, saw positive returns in May, with the sector posting gains of  0.5 percent.