Market Commentary Blog

The recovery in commercial real estate markets for the past several years has been uneven and often disappointing, much like the economy as a whole. More recent news, however, shows a turn for the better—and also signs that conditions may continue to improve.

Financial markets have been troubled by a decline in corporate profits. Earnings per share of the S&P 500 fell 7.6 percent in the first quarter of 2016 compared to last year, prompting a drop in equity prices and concerns about the outlook. But trends are going the other direction in real estate.

Many analysts have noted that increasing construction and high prices on commercial properties often presage a downturn in the sector, and have asked whether this cycle may be approaching the 9^th inning. NAREIT research economists have examined data from several sources to shed further light on the risks that the sector may be approaching a correction.

Investment real estate values declined by -0.32 percent during April 2016 according to the FTSE NAREIT PureProperty® Index Series, which provides the earliest measurement of changes in the market values of properties held for investment purposes. 

Here’s a comment that was much more common when I started this job in 2006 than it is today: exchange-traded equity REITs, people used to say, are essentially “just small-cap value stocks,” implying that they didn’t offer any significant diversification benefit that you couldn’t get simply by holding a mutual fund or ETF focused on the small-cap value segment of the stock market.

Stock exchange-listed Equity REITs have historically provided not merely strong long-term total returns and steady current income, but also several forms of diversification.

Macroeconomic data generally suggest that the U.S. economy remains in an extended period of soft growth and soft inflation—in fact, Federal Reserve officials have signaled their intent to continue monetary stimulus and tolerate slightly higher inflation to protect against further macro weakening. How have REIT investors fared in past periods of strong or weak macroeconomic growth, and high or low price inflation?

 If you’re a day-trader, average returns during long historical periods are irrelevant. For those with long horizons, exchange-traded Equity REITs have proven themselves over and over again.

As an asset class, stock exchange-traded equity real estate has provided higher returns than other public equity investments over most significant historical periods. The outperformance by exchange-traded Equity REITs for long holding periods has not been limited to just a small set of property types.

Both volatilities and correlations have come down and are now firmly within their long-term normal ranges. Estimated REIT volatilities were above 21.9% only from January 21st through February 19th, and was most recently estimated at 11.8% using data through April 15th.

The April release of state unemployment rates from the Bureau of Labor Statistics provides additional evidence that, in most of the country, labor markets are healthy and continue to strengthen. An exception to this improving trend is in oil producing states, where unemployment rates have been rising.