Market Commentary Blog

Total returns from a passively managed investment in listed U.S. equity REITs averaged 11.45% per year over the 25 years ending April 2015, compared to just 9.95% per year for large-cap U.S. stocks. 

Some market participants may be concerned about the future course of stock prices, but the correlation between listed REITs and the broad stock market is at its lowest level in more than 12 years, suggesting that whatever factors happen to drive the non-REIT part of the market will not necessarily spill over to affect the REIT market.

April non-farm payrolls and unemployment numbers offer encouragement that the labor market is regaining momentum after a weak show in March. The job market added 223,000 jobs in April, matching its 2014 trend and outpacing average growth in 2015 Q1. Further, the unemployment rate fell to 5.4%, its lowest level post-recession. 

Construction spending fell nearly 60 bps to a seasonally adjusted $966.6 billion in March, its lowest level in six months. Following a flat reading in February, growth in construction spending slowed to a 2% annual rate in March.

While some market participants raised concerns about market volatility during March and April, the listed REIT market remained relatively calm.  As the market closed on May 5 the 20-day rolling standard deviation of trailing daily returns for the FTSE NAREIT All Equity REITs Index was 0.82%, slightly below the median value going all the way back to the beginning of 1999. 

The fundamentals for the apartment sector continue to display strong performance. Demand for rental housing surged in the first quarter of 2015, with the total number of rental units increasing by 1.9 million units. This is the second consecutive quarter of healthy increases in rental occupancy, according to Census Bureau data beginning in 1965, surpassing a rise in rental occupancy of 1.5 million in the fourth quarter of 2007 at the onset of the housing crisis.

After a spate of soft numbers had hinted the housing market might stall, more recent reports show the recovery is back on. If the renewed upturn shows staying power, there are important implications not only for the housing sector, but also for the broader economy… and for REITs.
Sales of existing homes rose 6.1% in March, according to the National Association of Realtors®, to a 5.19 million unit annual rate. 

Multifamily housing starts declined in March, on the heels of a double-digit decline in February (first chart). Winter weather had an obvious impact delaying new construction across the nation in February, but the further decline in March suggests that the recent weakening of some macroeconomic trends, in part due to a stronger dollar and its impact on exports, may have damped builders’ enthusiasm for new projects. 

Commercial property prices continued their steady march upwards in February, according to Moody’s/ Real Capital Analytics. Rising occupancy, firming rent growth, increasing transaction activity and still-muted national supply trends are boosting valuations across all property sectors.

Two steps forward, they say, but one step back. In the case of the job market, March was one very big step back. Total nonfarm payrolls increased just 126,000, less than half the average pace over the past six months. There was one bit of positive news in an otherwise disappointing report, however, as average hourly earnings increased 0.3 percent. 

 Maybe the end of winter weather will bring with it a thaw in the housing market. The latest news gives some hope, at least with respect to home sales and house prices. New home sales increased 7.8 percent in February, to an annual rate of 539,000, the strongest sales pace since February 2008. The housing market appears to have worked off most of the excesses from the boom. Inventories of new homes for sale remain low, and the months’ supply of new homes dipped below 5 months.