WASHINGTON, DC-REITs have underperformed the larger stock market in August and September. For the first nine months of 2012, however, REIT returns kept pace with the broader market. The reasons for the slowdown in August and September are simple, Brad Case, NAREIT’s senior vice president of research and industry, tells GlobeSt.com: One, even in bull cycles—which REITs are in right now—there will be one or two off months. Another reason, he says, is the relatively early recovery of the commercial real estate market. “People became optimistic about CRE before they became optimistic about other parts of economy.” Now the rest of the market is catching up, he says.

Of course that doesn’t assuage REIT investors interested in the short term: on a total return basis, the FTSE NAREIT All REITs Index was up 1.85% and the FTSE NAREIT All Equity REITs Index was up 1.03% in the third quarter compared to 6.35% for the S&P 500.

On the other hand, NAREIT also reports that for the first nine months of the year, the FTSE NAREIT All REITs Index was up 17.57% and the FTSE NAREIT All Equity REITs Index was up 16.09% compared to 16.44% for the S&P 500. For the 12 months ended September 30, the FTSE NAREIT All REITs Index was up 34.37% and the FTSE NAREIT All Equity REITs Index was up 33.81%, while the S&P 500 was up 30.20%.

NAREIT also reports that almost all sectors of the REIT market produced double-digit total returns in the first nine months of the year, with the top performing sector being timber, with a 29.65% gain, followed by mortgage REITs, which were up 28.11%. Industrial was up 25.46%, retail was up 23.30%, office, up 14.08% and health care, up 13.67%.

Timber REITs’ surge is due to the revitalized housing sector, especially single-family homes, Case says. However, he is not discounting longer-term growth prospects for multifamily REITs, even though conventional wisdom suggests that rentals may have seen their best days in this particular cycle. “That is where investors have it wrong,” Case says. “They are thinking that now that housing construction is rising that will hurt rentals and apartment REIT returns, but they are way ahead of themselves.” In a normal market, perhaps, he says, but not this particular one. There is still a great deal of uptapped demand for rental housing, Case maintains.