In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, said that REIT shares continued to decline in October, but added that economic fundamentals continue to support the sector.
The total returns of the FTSE/NAREIT All REIT Index dropped 4.9 percent in October, while the S&P 500 index lost 1.8 percent. This was the third consecutive monthly decline in total returns of the FTSE/NAREIT All REIT Index. Returns for the FTSE NAREIT All Equity REITs Index declined 5.1 percent in October, while returns for the NAREIT Mortgage REITs Index fell 0.1 percent.
However, through Nov. 4, the FTSE/NAREIT All REIT Index recorded a return of 3.3 percent, while returns for the FTSE NAREIT All Equity REITs Index were 2.6 percent, and returns for the FTSE NAREIT Equity REITs Index stood at 1.5 percent. Returns for the NAREIT Mortgage REITs Index were 19.4 percent for the same period. Returns for the S&P 500 Index totaled 3.9 percent for the year to Nov. 4.
“It was a very poor month in October,” Case observed. “The last three months have been weak for investors in all segments of the equity markets,” he added.
Turning to property segments, Case noted that infrastructure REITs bucked the trend, “but just barely.”
The best performing segment in October was commercial mortgage REITs, Case said, where returns were up less than a percentage point.
“There really wasn’t any place to find good news in the REIT market, or pretty much any other part of the equity market,” according to Case.
Case attributed market weakness to uncertainty about the macroeconomic situation. Concerns that the Federal Reserve will implement interest rate increases by year end are being coupled with worries as to whether the economic expansion is actually strong enough to stomach a rate hike, he explained. “There is a tension” between the two, Case said.
However, Case noted that either decision—to raise rates or to keep them stable—“implies some good news.”
If rates rise, the economy is growing and no longer needs monetary stimulus, Case said. If the Fed decides that the economy isn’t strong enough to raise rates, “that puts us in a situation of moderate positive growth,” he added.
According to Case, REIT investors have historically not done best during periods of roaring growth, but rather in periods of moderate growth.
“Overall, conditions in the real estate market are very strong, but not overly strong, and that’s what gives me optimism going forward - not just for REIT investments but equity investments more generally,” Case said.