Market Commentary Blog

The apartment market led the way among commercial property markets in the third quarter, as robust demand pushed down the national vacancy rate and supported rent growth.

Pricing in the private real estate market has become more inflated, relative to REIT valuations, than at any time since 2007.

Commercial property prices have risen steadily since the beginning of the recovery from the Great Financial Crisis. Continued price gains, however, at some point begin to raise warning flags.

The correlation between REITs and the broad stock market has always been relatively low because REIT returns are driven by the real estate market cycle whereas returns for most other equities are driven by the much shorter business cycle.

The senior housing business is in the midst of a building boom the likes of which we have not seen for a couple of decades. 

Whether what you’re looking to purchase is simply the steady income typical of REITs and Treasuries or the broader performance and diversification benefits of the real estate asset class, the “price” for purchasing those investment return attributes through listed equity REITs is especially favorable now.

An investment performance comparison between listed equity REITs and the rest of the U.S. stock market—segmented by sector or by style—highlights the long-term diversification benefits of the listed equity REIT market.

Data centers house the servers and network equipment that make modern communications possible, including the Internet and data transmitted by cell phones. 

Excessive debt growth is a warning sign of an overheating real estate sector. Growth of commercial mortgage debt has been modest, however, at only half the pace of the prior cycle. Banks have been the mainstay of lending, but life insurers have shown increased appetite for commercial mortgages, and net issuance of CMBS turned positive in the second quarter. 

Investments from listed property companies in emerging markets have been especially strong over the past year, according to the FTSE EPRA/NAREIT Global Real Estate Index Series.  Over longer historical periods, however, risk-adjusted returns from listed U.S. equity REITs have outpaced those from listed real estate in both emerging markets and non-U.S. developed markets.

Vacancy rates are likely to remain low as adult members of shared households eventually strike out on their own. However, that the process may take longer than anticipated. 

The current bull market for exchange-listed equity REITs has rewarded investors with returns averaging more than 21% per year over the past 8½ years—but by the standards of previous real estate market cycles this one has not even hit its stride yet.