Two Trends May Move the Needle for REITs

WASHINGTON, DC—US equity REITs make headway in September regaining some of the ground they have lost during 2015. At the same time, two trends are emerging that could finally push REITs decisively in the direction of growth.

First, September's numbers:

NAREIT reported on Monday that the FTSE/NAREIT All REIT Index rose 1.9% in September, while the S&P 500 Index lost 2.5%.

Year to date, REIT total returns were down 4.5%, while the S&P 500 Index was down 5.3%.

According to NAREIT's initial publication of the numbers, the top-performing REIT sectors for September included self-storage REITs, which rose 6.2%, residential REITs, which increased by 5.4%, and industrial/office REITs, which rose by 3.8%.

This is the third month in a row that REITs outperformed the larger market, NAREIT's senior vice president for research and industry information Brad Case tells GlobeSt.com. "The most important factor for all real estate is the state of the overall US economy. I continue to be optimistic about macroeconomic growth, which continues to increase demand for real estate."

Friday's unemployment numbers were, of course, disappointing, he added. "But the trend has been for rising employment, so that is positive."

Also interest rates remain at their rock bottom levels after the Federal Reserve Bank declined to raise them in September. This, however, probably had little effect on REIT values as this increase has long been priced into REIT stocks, Case said.

The two trends positioned to have an impact, if they are not already, are 1) the turbulent and uncertain foreign economic situation and 2) the growing mismatch between valuations of privately-held real estate and publicly-held real estate, according to Case.

The first is a straightforward case of sticking with the "devil" you know, in this situation, the prospect of rising interest rates. The devil waiting in the wings is the uncertainty in Syria, a catering Chinese economy and Europe's engine of growth, Germany, beset by multiple forces.

"REITs are not exposed to foreign macro economic trends like many US companies are," Case said.

The second trend has been ongoing ever since, ironically, the sell off of REIT shares began this year.

Increasingly real estate investors are concerned that private valuations are now too high versus the now undervalued REITs, Case said.

REITs have opportunity to sell assets at very attractive prices to private investors now, he said, and there is speculation of greater privatization in the real estate industry. Regarding that latter point, Blackstone Group is exhibit A. After the private equity giant offered $6 billion for Strategic Hotels and Resorts in September, rumors started circulating that it was considering buying BioMed Realty Trust as well.

Whether or not that deal goes through almost doesn't matter: the forces are in place for similar transactions to come to market. It should be noted that Case is a bit less ambitious in his assessment of the situation. "It may be that we will continue to see some improvement in REITs from both of those trends," is what he tells GlobeSt.com.