Quick Study: REITs Trail S&P 500 in February

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 in relation to long-term real estate market cycles.

The total returns of the FTSE NAREIT All REITs Index dipped approximately 2.6 percent in February, while the S&P 500 gained more than 5.8 percent for the month. For the year, the REIT market is up 2.9 percent, whereas the S&P 500 is up 2.6 percent.

Case noted that the historical correlation between the REIT market and the broader stock market is low, so February’s results weren’t out of the ordinary.

“That generally works to the advantage of REIT investors, giving them a very strong diversification benefit,” he said. Yet, the fact that REITs underperformed for the month shouldn’t worry investors, according to Case. Down months are to be expected in the context of a long-term bull market, he said.

“It’s very normal to have negative months during a bull market,” he commented. “Only about two out of every three months during a bull market cycle are positive months.”

Infrastructure REITs had a relatively strong month with returns above 1 percent in February. Mortgage REITs also performed well and are providing “very strong” dividend yields, according to Case.

Case cautioned against assessing market performance in terms of months or years, rather than market cycles.

“The real estate market cycle has tended to be a quite long one, close to 18 years, and that’s something that we’ve seen since the 1930s,” he said. “If this market cycle is like previous ones, we’re still in the early game.”
Case also noted that investors should pay attention to construction markets.

“What we see in construction markets is still very low levels of construction, not even back to the levels that we would think of as normal in a growing economy,” he said.