This article is republished with permission from REITCafe.
Real estate investment trusts (REITs) pulled back slightly in May as their outlook became less certain. Strong April job growth has helped fuel demand for real estate, and underlying real estate market fundamentals are healthy. However, consumer spending has picked up less than expected given the decrease in fuel prices. Investors are also wary of an interest rate increase that could make REITs, with their high-dividend yields, less attractive compared with other investments.
The mixed economic news has made a near-term increase in interest rates increasingly unlikely, which is good news for REITs, but the combination of factors led investors to pull money out of REITs during May. The FTSE NAREIT All Equity REIT average declined 0.22 percent during the month, bringing the year-to-date total return to –1.38 percent.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2014 | End 2013 | |
| Industrial | 157 | 151 | 153 | 138.5 | 170 |
| Multifamilty | 150 | 148 | 148 | 139.8 | 166.7 |
| Office | 157 | 153 | 155 | 148 | 175 |
| Retail | 157 | 151 | 154 | 139.8 | 175 |
| Average Spread | 155.25 | 150.75 | 152.5 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.40 | 2.09 | 2.12 | 2.17 | 3.04 |
Self-storage REITs posted the best returns, with a monthly gain of 3.68 percent. The four public REITs in the sector each reported healthy growth in first-quarter revenue and net operating income, along with improved occupancy compared with year-ago levels. At the same time, the construction pipeline is low, which should help drive future rent growth.
Manufactured-home REITs posted a 2.75 percent gain for the month. The two largest REITs in this sector, Equity Lifestyle Properties (ELS) and Sun Communities (SUI), beat first-quarter consensus estimates.
With a 1.67 percent monthly gain, timber REITS also performed comparatively well in May. Following a cold winter that limited building activity, U.S. homebuilding rebounded during April, which has generated greater demand for lumber. Still, because of soft market conditions earlier in the year, timber REITs have underperformed the market so far in 2015.
The weakest sectors were freestanding retail REITs (–2.53 percent) and health care REITs (–2.50 percent). Infrastructure REITs remained volatile: after ranking as the best performing sector in April, these REITs posted a –2.05 percent return for May.
REIT conversions, spinoffs, and mergers continued. No REIT initial public offerings (IPOs) occurred during May, but data center company Equinix (EQIX) received a favorable ruling from the Internal Revenue Service for its REIT conversion during the month and also announced a $3.6 billion acquisition of Telecity Group.
Mixed economic news and ongoing interest rate concerns kept REIT performance essentially flat. Still, underlying real estate fundamentals are solid, and the Federal Reserve appears disinclined to raise interest rates before fall. These factors should help move the sector forward during the second half of the year, but 2015 REIT performance will ultimately hinge on interest rate movement.
* 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 6/5/2015.
