08/01/2013 | by
Article Author(s)
Quick Study: REIT Market Reacts to Interest Rate Increases

In the latest edition of “Quick Study,” Brad Case, NAREIT’s senior vice president of research and industry information, provided an analysis of the REIT market’s performance in July.

July was the third consecutive month that the REIT market underperformed the broader stock market. The U.S. Equity REIT market delivered total returns of 0.83 percent in July, according to NAREIT data. The S&P 500 was up 5.09 percent for the month. The NASDAQ Composite returned 6.56 percent for the month.

“Over the last year, REITs have been up about 10 percent, but it’s been a spectacular run for the stock market. The S&P 500 has been up 25 percent over the last year, and the Russell 2000 small cap stocks have been up 35 percent over the last year,” Case said. “So, really, the story is not so much about weakness in the REIT industry. It’s that recently the REIT industry has underperformed the stock market because the stock market has been roaring."

Case said that recent increases in interest rates have had an impact on the REIT market.

“I think the market is reacting to the fact that we’ve seen interest rates increasing,” he said, “although, more recently, we’ve seen some sign from the [Federal Reserve] that they’re not going to let interest rates get ahead of the economy.”

However, Case said he thinks the stock market may be reacting “inappropriately” to the  recent news about monetary policy.

“We’ve seen some discussion that kind of treats commercial property just like bonds,” he said. “If interest rates go up, the value of a bond will fall. But that’s because a bond is a fixed-income instrument. Commercial property is not. Generally speaking, when interest rates are going up, it’s because the economy’s strengthening, and that’s certainly what we’re seeing now.”

In terms of trends that stood out during the month, Case said one of the weakest performing sectors has been multifamily. He attributed that to investors misreading signals from the broader economy.

“This is based on a rule of thumb that works in a normal market, but we’re not in a normal market,” he said. “I think people have been looking at strength in the single-family market and increase in mortgage lending and saying, ‘Does that spell bad news for apartment rental REITs?’ And the answer is it does not.”

Additionally, Case said the strongest performing sectors—lodging,  industrial, office and retail—are benefitting from an “increase in confidence in the pace of the economic recovery.”