REITs Move Lower in May

REIT returns lost ground in May and lagged the broader market, as investors remained cautious on several fronts, market watchers said.

The total returns of the FTSE NAREIT All REITs Index fell 0.2 percent in May, while the S&P 500 posted a return of 1.4 percent. Total returns of the FTSE/NAREIT All Equity REITs Index dropped 0.1 percent in May. The total return of the FTSE NAREIT Mortgage REIT Index fell 1.3 percent. The yield on the 10-year Treasury note dropped 10 basis points for the month.

Paul Adornato, managing director at BMO Capital Markets, pointed to concerns affecting real estate relative to the broader market at both the macroeconomic and sector levels. 

“Uncertainty regarding tax reform - which could affect real estate disproportionately - still exists,” Adornato said.  At the same time, despite the broad expectation of more interest rate tightening, the uncertain timing of the Federal Reserve’s next move seems to be weighing on real estate, he added.

Adornato said the factors that have contributed to volatility, including interest rates and political uncertainty, do not appear to be going away, “which means volatility through year-end seems like a safe bet.”

Industrial, Manufactured Home REITs Outperform

On the sector level, bright spots included manufactured home REITs, which rose 3.8 percent in May. “Manufactured home REITs have the wind at their backs,” Adornato said.

Meanwhile, healthy supply and demand fundamentals helped push industrial REIT returns up nearly 3 percent for the month.

On the other hand, retails REITs finished what Michael Lewis, director of REIT equity research at SunTrust Robinson Humphrey Lewis, described as “a brutal month,” dropping 7 percent. The challenges affecting the major retail companies, which have seen waves of bankruptcies and store closures, are bleeding over into investors’ views of retail REITs, according to Adornato.

“Retail has stolen the headlines not only in the business section, but has entered the general consciousness as well,” he observed.

Adornato predicted that the growth of e-commerce and its impact on brick-and-mortar merchants will continue to play out over the next two or three years.

However, in a recent edition of The REIT Report: NAREIT’s Weekly Podcast, Calvin Schnure, NAREIT’s senior vice president for research and economic analysis, pointed out that older shopping centers are most vulnerable to the shifts in buying habits. REITs primarily own newer properties in higher-income markets with better job growth, he said. In reality, Schnure said, REITs are able to fill vacancies left by departed retailers, and are actually looking for more productive tenants to take over the empty spaces.