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REIT Returns Leave Broader Market in the Dust: A First Quarter Triumph

In a resounding display of strength, returns on equity REITs left their counterparts in the broader market far behind during the initial quarter of 2014. Analysts, buoyed by the solid fundamentals that continue to bolster the sector, expect this trend to persist.

The FTSE NAREIT Equity REITs Index witnessed total returns that soared by nearly 10 percent in the first quarter, a staggering achievement when compared to the paltry 1.8 percent gain seen in the S&P 500 Index during the same period. The FTSE NAREIT All REITs Index followed suit with commendable gains of 8.6 percent in the first quarter. However, it’s worth noting that REIT returns experienced a gentle ebb in March when contrasted with the preceding two months of the year.

March saw the FTSE NAREIT All REIT Index generating a mere 0.3 percent in total returns, a rather modest figure when juxtaposed with the 0.8 percent growth observed in the S&P 500 Index.

“We’ve witnessed a remarkable surge in stock pricing momentum, and now we find ourselves in a momentary pause,” commented Mike Salinsky, director at RBC Capital Markets. “But fear not, as the fundamentals within this realm continue to stand tall.”

Salinsky pointed out that REITs grappled with the consequences of a slight upturn in the 10-year Treasury note yield during March, a slight deviation from the flat performance of the previous month. The 10-year Treasury yields climbed by 0.1 percent in March, a move that did not go unnoticed in the REIT market. Ashtyn Evans, a REIT analyst with Edward Jones, noted that the market experienced fluctuations driven by shifting expectations surrounding interest rates. Evans highlighted the market’s keen attention to remarks made by Federal Reserve Board Chairman Janet Yellen, who hinted at the possibility of an early start to raising short-term interest rates next year.

Looking ahead, industry observers are optimistic about the enduring strength of market fundamentals. On April 1, a report jointly published by the Urban Land Institute (ULI) and EY underscored the gradual improvement witnessed in both the economy and real estate market fundamentals.

“Favorable developments extend beyond the multifamily domain, with the retail sector now joining the party. The overall outlook for real estate remains positive, propelled by anticipated ongoing improvements in the economy,” asserted Anita Kramer, vice president of the ULI Center for Capital Markets and Real Estate.

“Fundamentals are robust at present. We’re witnessing stronger balance sheets, which will empower REITs to grow through acquisitions, development, and dividend increases,” affirmed Evans.

Evans stressed that the supply across all property types is generally limited, a factor that should bolster rent growth. Salinsky concurred, mentioning that, except for the apartment sector, “we aren’t witnessing significant supply in any of the sectors.”

The first quarter of 2014 showcased exceptional performance, with residential REITs raking in impressive total returns of 13.7 percent. Self-storage REITs were not far behind, notching gains of 13.1 percent. Meanwhile, the industrial and office sectors achieved returns that soared above 11 percent, solidifying their robustness throughout the first three months of the year.

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