This article is republished with permission from REITCafe.
Returns on real estate investment trusts (REITs) turned slightly negative in November following a strong performance in October. The FTSE NAREIT All Equity REIT average declined by 0.17 percent, and after experiencing ups and downs throughout the year, total year-to-date REIT returns at the end of November measured 1.50 percent.
Timber REITs gained 13.46 percent during November. News of their $8.4 billion merger drove Plum Creek up about 25 percent and Weyerhaeuser up about 10 percent for the month. Still, despite increased housing starts, Chinese demand for U.S. timber has decreased, and timber prices have not increased. Year-to-date, timber is one of the worst-performing REIT sectors this year with a –0.42 percent return.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2014 | End 2013 | |
| Industrial | 163 | 164 | 171 | 138.5 | 170 |
| Multifamily | 159 | 160 | 166 | 139.8 | 166.7 |
| Office | 166 | 171 | 175 | 148 | 175 |
| Retail | 161 | 164 | 171 | 139.8 | 175 |
| Average Spread | 162.25 | 164.75 | 170.75 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.27 | 2.26 | 2.14 | 2.17 | 3.04 |
Self-storage (+4.55 percent) and apartment (+3.38 percent) REITs maintained strong growth during November, driving year-to-date returns above 30 percent for self-storage and above 13 percent for apartments. For self-storage, supply constraints and ongoing demand have fueled sector growth. Favorable demographic trends are keeping apartment market fundamentals strong in spite of increased construction.
Weak retail news battered regional mall REITs during November. The sector was down 7.01 percent for the month. U.S. retail sales climbed 0.1 percent in October, which was less than expected, and the Conference Board reported lower, but still positive, consumer confidence. Holiday sales growth is forecast to be moderately positive, but not as strong as in 2014. The strong dollar is also affecting companies invested in international markets. The largest regional mall REIT, Simon Property Group, announced early in November that it beat third-quarter consensus estimates, but its stock still declined during the month.
The current environment, in which market fundamentals are healthy but REIT prices are down, has led to stock buybacks, privatizations, and mergers and acquisitions.
All eyes are on the Federal Reserve and interest rates as the end of the year approaches: the Fed is widely expected to increase its benchmark interest rate at its upcoming December 15–16 meeting. Investors are waiting to learn whether an interest rate hike is already baked into REIT values, or if a rate increase will drive REIT valuations down.
* 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 12/4/2015.
