This article is republished with permission from REITCafe.
Real estate fundamentals and real estate investment trust (REIT) performance benefited from positive economic news during May. Retail sales experienced their biggest increase in a year with a 1.3 percent jump during April, according to the U.S. Department of Commerce. Manufacturing also grew in May, although at a slow pace, as indicated by the small increase in the ISM Manufacturing Index. The pace of new-home sales and home resales accelerated during April. The positive news was tempered by a worse-than-expected April jobs report as the brisk hiring of the first quarter slowed. Some retailers also posted disappointing first-quarter earnings, while others announced plans to shutter stores, as e-commerce continued to compete with bricks-and-mortar stores.
REIT investors appeared to largely shake off the negative economic news. The FTSE NAREIT All REIT Index closed May with a 2.34 percent return that outpaced the Standard & Poor’s 500, Dow Jones Industrial Average, and Russell 2000. Year-to-date returns of 6.53 percent well outpaced broader markets.
Single-family homes, data centers, and industrial REITs were May’s best performers.
- Single-family REITs are profiting from strong demand and limited new-home construction. The nation’s median existing-home price gained 6.3 percent between the first quarters of 2015 and 2016. The two largest REITs—American Homes 4 Rent (AMH) and Colony Starwood Homes (SFR)—both beat first-quarter consensus earnings.
- Strong demand and limited new supply also are enabling data centers to outperform and led Equinix (EQIX) and Digital Realty Trust (DLR) to beat first-quarter consensus earnings estimates.
- Expansion of e-commerce is driving demand for warehouse space, and even though the pipeline of new supply is large, new space that meets requirements of today’s tenants is more attractive than existing vacant space, which is more likely to be functionally obsolete.
Lodging (–2.79 percent), regional malls (–1.64 percent), and timber (–1.20 percent) REIT sector returns lagged. New supply is affecting lodging sector performance, while expansion of e-commerce and store closures are affecting regional malls. China’s economic woes and the previously mentioned limited new home construction are affecting timber REITs.
Several notable mergers and acquisitions involving REITs were announced during May. Privately held, Maryland-based JBG Companies and New York REIT announced plans for an $8.4 billion merger. The combined company will be renamed JBG Realty Trust and will be headquartered in Maryland. In addition, Sovran Self Storage announced plans in May to acquire privately owned LifeStorage for $1.3 billion in cash. The acquisition includes 84 properties, many of which are in markets like northern California and Las Vegas that are new to SSS. The deal is expected to close in the third quarter and will be funded by a new common stock offering.
Real estate market fundamentals are healthy, and REITs continue to outperform broader markets this year. Looking forward, we will be watching for a potential interest rate increase in mid-June and its effect on the REIT market.
