In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, discussed a down month for REITs during April.
The total returns of the FTSE NAREIT All REITs Index dipped approximately 4.7 percent in April, following a gain of 1.2 percent the month before.
“It was a difficult month for REIT investors,” Case said, although he stressed that it wasn’t a good month for investors in any asset class.
“For REIT investors, what happened in April took away the gains that had been built up during the first quarter of the year,“ Case noted. REITs are now down for the year by less than 1 percent, whereas the S&P 500 Index is almost 2.0 percent higher for the year to April 30, he added.
Case highlighted that it’s common to see a month, or even a quarter, of negative performance during a longer bull market. “The fact that we saw REITs do so badly in April relative to some of the other assets out there doesn’t mean that the bull market is over,” he pointed out.
Two major factors were weighing against the market in April, according to Case: concerns about the broader economy and the direction of interest rates.
“I actually think both of those concerns are somewhat misplaced,” Case said. He explained that while demand conditions in the macroeconomy impact the broader market, real estate markets are more attuned to supply conditions. Because of the time involved in ramping up new construction, nearly every property sector nationwide is still under replacement levels for new construction, Case said.
“We’re nowhere near an over-constructed situation, which is usually what leads to softness in the commercial real estate market,” he observed.
Meanwhile, Case noted that, historically speaking, rising interest rates are generally good news for REIT investors because it means that the economy is expanding.
Case also highlighted the $22 billion in new capital that REITs raised in the first quarter.
“What we’re seeing is REITs preparing to make acquisitions that are likely to increase their earnings going forward,” he said.
Turning to individual market segments, Case noted that the infrastructure segment went against the trend, gaining approximately 1.0 percent for the month. Providers of commercial mortgage financing also had gains approaching 1.0 percent in April.
And while the apartment segment lost ground in April, it is 3.8 percent higher for the year to April 30. Likewise, Case noted, the self storage segment is up 4.4 percent for the year to April 30.
“There are different pockets of good news even during a tough month,” Case said.