REITs Make Gains in October, Continue to Outperform Broader Market

REITs made gains in October and continued to outperform the broader stock market, supported by solid earnings reports and growing momentum in the economy.

The total return on the FTSE NAREIT All REITs Index was up 8.7 percent for the month after dropping 5.6 percent in September. The S&P 500 Index rose 2.4 percent in October. As of the end of October, the FTSE NAREIT All REITs Index had gained 23 percent, while the S&P 500 was up 11 percent.

“It was a dramatic outperformance this month, but it’s not really a surprise when you get a 10-year (Treasury note) where it is,” said Alexander Goldfarb, managing director at Sandler O’Neil & Partners. Yields on 10-year Treasury notes dropped 0.2 percent in October.

Paul Morgan, managing director at MLV & Co., said October reflected a more optimistic view of the broader economy.

“Once some of the macro angst that was effecting the broader market lifted and we woke up and rates were still at 2.3 percent and the economic outlook looked a lot better, (REIT) stocks looked pretty cheap after the sell-off in September,” Morgan observed.

He added that REIT fundamentals remain strong: “There’s not a lot of development across most sectors, and that’s helping boost core growth. It’s a really good, positive environment for REITs.”

Brad Case, NAREIT senior vice president for research and industry information, said “investors were cheered that the macroeconomic recovery maintained its momentum, and earnings have continued to be strong.”

Case added that while there is still concern among some investors that the broad stock market may be nearing a correction, “the real estate market still seems to be early in its market cycle with construction still below normal levels in most, if not all, property types and geographic areas.”

Meanwhile, REIT corporate earnings for the third quarter have been positive across most property types, according to Morgan.

“We’ve had a nice earnings season. Stocks have continued to respond well through earnings, and core growth is good,” Morgan said.

The strongest performances among the various property types during October were in the health care, industrial, residential and self-storage REIT sectors. All showed gains greater than 9 percent for the month, Case noted.