This article is republished with permission from REITCafe.
As temperatures rose in August, so did the turmoil for real estate investment trusts (REITs). As of August 18, the FTSE NAREIT All Equity REIT average monthly total return was up 2.38 percent; but by month’s end, it had lost its gains and more. The FTSE NAREIT All Equity REIT average declined 5.82 percent during August.
REITs compared favorably with broader stock market indices, which were down more than 6 percent. The economic slowdown in China weighed on REITs because of its expected effect on interest rates, the U.S. economy and job growth, and Chinese investment in U.S. real estate. REIT losses were broad-based across all real estate property type sectors.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2014 | End 2013 | |
| Industrial | 166 | 165 | 149 | 138.5 | 170 |
| Multifamily | 161 | 161 | 146 | 139.8 | 166.7 |
| Office | 174 | 173 | 158 | 148 | 175 |
| Retail | 166 | 165 | 150 | 139.8 | 175 |
| Average Spread | 166.8 | 166.5 | 150.6 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.12 | 2.18 | 2.22 | 2.17 | 3.04 |
Infrastructure and self-storage REITs were the best sectors during August.
- Infrastructure REITs declined by 1.4 percent in August and were down a similar 1.5 percent year-to-date. Share values for both American Tower (AMT) and Crown Castle (CCI), the two largest REITs in this sector, declined during August because, despite positive long-term outlooks, both companies reported weak second-quarter earnings that missed estimates.
- Self-storage REITs were down 1.94 percent in August, but self-storage remains the best-performing sector year-to-date, with a gain of 13.44 percent. Limited new construction has helped keep this sector strong.
Total returns for residential REITs declined 4.72 percent during August, but the sector’s year-to-date gain still measured 2.45 percent. Fueled by strong demand for inexpensive homes, manufactured housing eked out slightly better monthly performance than apartments and remains one of the healthiest REIT sectors so far this year.
Office markets took a surprisingly strong hit during August. REITs declined 8.65 percent. The July jobs report was fairly strong, which is a good indicator for office demand. However, the weakening Chinese economy heightened concerns that the spigot of Chinese money flowing into U.S. office investments could slow or dry up, which could affect property valuations in markets where the Chinese have been active buyers.
Timber also experienced a strong downturn in August. Its 7.47 percent month decline was also related to China. U.S. housing construction starts have been healthy, reaching an almost eight-year high in July, but concerns about rising interest rates and their effect on affordability and demand affected the sector. The slowing Chinese economy and devaluation of the yuan will affect U.S. timber exports to China.
Market volatility has prevented companies from pulling the trigger on initial public offerings (IPOs). In fact, several companies have delayed IPOs because of market conditions.
Underlying real estate market fundamentals are healthy in spite of the stock market turmoil. As a result, lower REIT stock prices may have created a buying opportunity.
* 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 09/04/2015.
