This article is republished with permission from REITCafe.
Real estate investment trusts (REITs) experienced some ups and downs during February and ended the month with relatively flat performance. The FTSE NAREIT All REIT Index was down –0.29 percent during the month. Positive performance by mortgage REITs largely offset the decline in the equity REIT sector. Current REIT performance reflects broader market behavior but could also signal that markets may be plateauing.
Much recent economic news has been positive. Interest rates remain low, in spite of the small December increase, and significant further increases seem unlikely. The U.S. economy continues to add jobs, which creates demand for real estate. ADP estimates that the U.S. private sector gained 214,000 new jobs during February. Service sector job growth is robust. The rate of decline for the U.S. manufacturing sector lessened during February, according to the Institute for Supply Management. Consumer spending rose in January, but questions abound about its February trajectory, especially since ongoing turmoil in the financial markets contributed to a February decline in consumer confidence.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2015 | End 2014 | |
| Industrial | 177 | 178 | 161 | 163 | 138.5 |
| Multifamily | 175 | 175 | 170 | 168 | 139.8 |
| Office | 183 | 185 | 164 | 168 | 148 |
| Retail | 177 | 177 | 165 | 168 | 139.8 |
| Average Spread | 178 | 178.75 | 165.00 | 166.75 | 141.5 |
| 10-year Treasury Yield** | 1.88 | 1.76 | 2.15 | 2.27 | 2.17 |
Real estate market fundamentals are healthy. Demand is strong, and supply is mostly in check. Real estate asset values are high, benefiting owners who are selling properties, but making acquisitions more difficult. As a result, REIT managers are increasingly evaluating share buybacks and mergers and acquisitions to grow shareholder value.
Lodging REITs experienced an especially strong month during February. Total returns were up 7.62 percent. Late in the month, Hilton Worldwide confirmed plans for a REIT spin-off for 70 mostly domestic-owned properties totaling 35,000 rooms. Hilton also plans to spin off its timeshare business, Hilton Grand Vacations, as a separate public company.
Manufactured homes (+4.23 percent), freestanding retail (+3.36 percent), and specialty (+2.03 percent) REITs also ranked among the best-performing REIT sectors.
For now, real estate market fundamentals are strong, and capital continues to flow into the REIT sector. REITs, with their current 4.05 percent dividend yield, remain attractive in the current low-interest-rate environment. However, recent REIT performance also indicates that some investors expect the pace of growth to decelerate, especially since low oil prices and global economic issues are affecting the U.S. energy and technology industries.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 2/26/2016.
