This article is reprinted with permission from TreppTalk.

According to the Washington, D.C.–based National Association of Real Estate Investment Trusts (NAREIT), the FTSE NAREIT All REITs Index was up by 0.6 percent in August, as “investors adopted a hesitant stance amid broader macroeconomic uncertainty.” The S&P posted a comparably flat 0.3 percent total return last month. For 2017 year-to-date, the FTSE NAREIT All REITs Index gained a 7.4 percent total return, while the S&P 500 returned 11.9 percent. The ten-year Treasury note yield is down 0.3 percent for the year through August.

Infrastructure and data center REITs made the most significant gains last month. The six infrastructure REITs overall returned 7.5 percent in August, while data center REITs posted a 4.1 percent total return. Industrial REITs also outperformed last month, gaining 3.6 percent. The retail REIT sector dipped by 1.7 percent, but the freestanding retail subsector generated a positive 3.8 percent return.

TREPP-i Survey Loan Spreads (50–59% LTV)* 
August Average
Previous Month
End 2016
End 2015 End 2014
Industrial 146 142 153 163 138.5
Multifamily 141 140 153 168 139.8
Office 158 151 160 168 148
Retail 151 144 157 168 139.8
Average Spread 149 144.25 155.75 166.75 141.5
10-year Treasury Yield** 2.16 2.27 2.44 2.27 2.17

On the other hand, the worst-performing REIT sector in August was lodging. The 18 hotel sector constituents posted a –3.3 percent total return overall, followed by shopping centers (–3.1 percent) and regional malls (–2.9 percent). Office REIT returns lost 1.1 percent on the month, and health care REITs dipped by 0.1 percent as “concerns about the skilled-nursing segment weighed on shares.”

Although last month’s REIT performance saw little change in terms of overall total returns, the sector is making a notable break from interest rate correlation. Bloomberg senior REIT analyst Jeff Langbaum notes that the REIT market was largely driven by interest rates and moves in the 10-year Treasury note up until mid-to-late 2016. Now, performance has “clearly shifted to being driven by fundamentals and tenant performance.” Research from Hoya Capital Real Estate reinforces this shift, as volatility in the REIT sector has declined considerably since late 2016. However, the subsectors have substantially differing levels of volatility, since the spread between data center REITs and regional mall REITs is 47 percent.

As correlations between REITs and interest rates have returned to their historical average near zero, the sector can benefit from fading investor uncertainty at the next interest rate hike. Investors will likely be able to focus more heavily on the underlying property type fundamentals, as well as tenant quality to gauge REIT performance in the near future.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.