NAREIT headquarters NAREIT headquarters in Washington, DC; the association says REITs underperformed the S&P 500 in the first month of this year. (Photo: Tishman Speyer)

WASHINGTON, DC—The primary US REIT indexes got the year off o a sluggish start by underperforming the S&P 500, according to NAREIT data. However, five property segments outperformed the broader market in January.

January saw the FTSE NAREIT All REITs Index, the broadest index of the domestic REIT market, deliver a 0.24%, the FTSE NAREIT All Equity REITs Index deliver a 0.17% total return and the FTSE NAREIT Mortgage REITs Index return 1.60%. All fell short by comparison to the S&P 500’s 1.90% total return for the month.

For individual sectors, though, it was a different story. Specialty REITs outperformed the S&P 500 by a wide margin, with a total return of 9.42%. Other winners included data center REITs, up 8.05%; single-family home REITs, up 6.14%; and timber REITs, up 3.71%.

On a 12-month trailing basis ending Jan. 31, the FTSE NAREIT Mortgage REITs Index was up 31.73%, outpacing the S&P 500’s 20.04% gain over the year-ago period. The FTSE NAREIT All REITs Index was up 13.50%, and the FTSE NAREIT All Equity REITs Index was up 12.78% in the 12-month period.

Eight REIT property sectors outperformed the S&P 500 on a 12-month basis, led by single-family homes with a 47.92% return. The others included lodging/resort REITs, up 34.09%; data center REITs, up 31.6%; specialty REITs, up 31.08%; industrial, up 30.21%; timber, up 29.41%, office, up 25.32%, and diversified, up 22.47%.

In a blog posting late month, NAREIT’s Calvin Schnure and Alexandra Thompson note that REITs are underpinned by solid fundamentals, including further declines in vacancy rates and rent growth across most markets. “Industrial properties continue to shine, on the strength of shipments of e-commerce purchases,” they wrote. Office and retail markets saw further tightening as well. The apartment sector, in contrast, appears to have hit an air pocket, with vacancy rates edging upward and rent growth slowing further.”

In the fourth quarter of last year, vacancy rates in the industrial, office and retail sectors were down five to nine basis points compared to Q3, and were down 35 to 50 bps from a year ago. However, apartment vacancies have risen for six consecutive quarters, and ended Q4 78 bps above their low point in Q3 2014.

With the steepest deceleration in rent growth among property types—off 2.3 percentage points from the year-ago period—coupled with the vacancy increases, apartments are seeing some softening, and Schnure and Thompson noted that this shouldn’t come as a surprise. “Signs of cooling after a torrid run in 2014 and 2015 have been widely noted,” they wrote. What is surprising, however, is the data suggest that a surge of new supply may not be playing as much a role in the sector’s slowing as is commonly believed.” In fact, new completions of apartment properties were down 15% in ‘16 compared to the year prior.

“A cooling in demand has played a larger role in the apartment sector’s recent softening than has the supply wave,” Schnure and Thompson wrote, citing a 45% decrease in net absorption compared to ‘15. Yet there’s still sizable pent-up demand in the sector, with a higher percentage of young adults living at home than at any time since the 1940s. “As wages increase and more civilians enter the labor force, demand for apartments will likely return to higher levels,” they wrote.