REIT Fundamentals Remain Favorable, Despite September Downturn

REIT fundamentals remain favorable despite weakness in the sector’s stock performance during September, according to Brad Case, Nareit senior vice president for research and industry information.

The total returns of the FTSE Nareit All REITs Index dropped 0.6 percent in September, while the S&P 500 posted a total return of 2.1 percent. For the first nine months of 2017, total returns of the FTSE Nareit All REITs Index gained 6.7 percent. The S&P 500 returned 14.2 percent through the end of September.

Case described September as a month of “mean reversion.” He explained that the strongest stock performers in September had been the weakest before that point, namely lodging and self-storage REITs. The weaker performers in September had been the strongest beforehand: infrastructure, data center and manufactured home REITs.

For the larger market as a whole, Case noted, 2017 has been a year of large disparities in performance: Large cap growth stocks have outperformed, whereas small cap value stocks have languished. Case explained that REIT market performance has traditionally been more similar to that of small cap value stocks compared to other parts of the broader stock market. During 2017, REITs moved ahead of small cap value stocks, although that gap did start to close in September, he noted.

Case also observed that REITs have been undervalued for most of 2017. “That part of the performance disparity did not close significantly during September,” he said.

Meanwhile, overall fundamentals remain healthy, according to Case. He pointed to slow but steady macroeconomic improvement and improvement in the demand conditions that tend to result in higher rent growth and occupancy levels. At the same time, supply is only increasing modestly.

“Conditions are really quite favorable for real estate investing and specifically for REITs,” Case said.

Turning to specific property sectors, Case pointed out that retail REITs began to recover in September. Retail REITs bucked the overall trend to post total returns of 0.7 percent in the month.

“The impact of e-commerce is likely to be more severely felt outside of the REIT space than in, and I think investors are starting to realize that,” Case said.