Market Commentary Blog

The yield spread to Treasuries as of the end of 2016 was in the bullish part of its historic range—and if a wide variety of estimates of the past relationship between spreads and forward-looking returns continues to hold, that currently bullish spread would suggest relatively bullish future total returns for investors in exchange-traded Equity REITs.

The diversification benefits of exchange-traded Equity REITs relative to the non-REIT parts of the stock market have persisted throughout a long period encompassing an almost unfathomly severe downturn—yet they have almost never been stronger than they were as 2016 came to a close.

The data show positive fundamentals entering the New Year. Supply remains in check, and demand growth is sustained, despite some bumps along the way. 

While the factors that drive Equity REIT returns are always somewhat different from those driving the returns of non-REIT stocks, the differences between the two equity asset classes—real estate and non-REIT stocks—have rarely been more different than they are as of the start of 2017.

A below-standard year for exchange-traded Equity REITs was still better than their counterparts in the illiquid real estate market, while a stunningly successful year for exchange-traded Mortgage REITs wasn’t all that out of the ordinary.

How well are stock-exchange listed Equity REITs positioned for the interest rate environment ahead? 

The apartment market has been riding a wave of robust demand and rapidly rising rents for the past several years, pushing multifamily into the leading ranks of commercial real estate. Recently, however, there have been some signs of softening.

One of the most important investment metrics is the term structure of correlations between any two assets.  Correlation measures the degree to which the returns for a pair of assets move together.

The bedrock of any investor’s portfolio—no matter how small, no matter how large—is an allocation to the broad U.S. stock market.  To go just the tiniest step further, most investors start with a mix of U.S. stocks and U.S. bonds.  The question is what to add to that basic portfolio.

As of the end of September 2016 the average dividend yield for stock exchange-traded Equity REITs was 3.70%.  That’s extremely low by historical standards: in fact, the average Equity REIT yield has been greater than 3.70% nearly 90% of the time stretching all the way back to the beginning of 1972. 

What happens if “two steps forward, one step back” turns into “two steps forward, two steps back”?

The REIT industry has evolved as it has expanded, and looks quite different today than it did a generation ago.