WASHINGTON, DC—REITs may be outperforming the broader stock market generally, but that doesn't mean the sector won't see an off month now and then. April was just such a month, in which the total returns of the FTSE NAREIT All REITs Index declined approximately 4.7%, after a gain of 1.2% during March. In contrast, the All REITs Index produced a total return of 4.05% during the first quarter, compared to the 0.95% return on the S&P 500 during the same period.

“For REIT investors, what happened in April took away the gains that had been built up during the first quarter of the year,“ says Brad Case, SVP of research and industry information at NAREIT, in a video interview. He called it “a difficult month for REIT investors,” but adds that “it wasn't really a good month for investors in any asset class.” Small-cap stocks were down by 2.5% for the month, while returns on large-cap stocks rose, but by less than 1%.

During bull markets, Case says, “it's common to see a month, or even a quarter, of negative performance during the longer bull market. So the fact that we saw REITs do so badly, relative to some of the other assets out there, in the month of April doesn't mean the bull market is over.”

Two over-arching factors weighed on REIT stock performance in April, Case says. They were concerns about “the strength of the macro-economic recovery” and a worry that interest rates might go up later in the year. He considers both concerns “somewhat misplaced.”

In looking at the macro-economic environment, says Case, while demand conditions affect the broader stock market, “in the real estate market, what's more important are the supply conditions.” What differentiates commercial real estate from other industries in the economy is that “it takes so long to ramp up new construction.”

In fact, he says, in virtually every property type, “we're still under replacement levels of new construction. We're nowhere near an over-constructed situation, which is usually what leads to softness in the commercial real estate market.”

He calls the interest rate question a “conundrum,” in that a softening economy generally correlates to lower interest rates. Therefore, when improving economic conditions lead to rising interest rates, “that's good news for REIT investors, because the economy is stronger, occupancy rates are higher, rent growth is higher and the value of commercial property is higher. Therefore, REIT returns are higher.”

A similar point was made in a recent NAREIT interview with Joe Fisher, director and co-head of the Americas, real estate securities with Deutsche Asset & Wealth Management. He noted that the perception that REITs are more affected by rising rates than most asset classes comes down to “the underlying business,” given the capital-intensive nature of real estate trusts. However, Fisher said that Deutsche recently published a paper based on historical data from 1993 to 2014, showing that REITs underperform equities by a small margin over the six-month time period in which interest rates increase,  but then outperform the broader market following that time period.