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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. 

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. 

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.

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. 

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.

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. 

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.

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. 

Total returns from a passively managed investment in the broad listed U.S. equity REIT market averaged 11.46% per year over the 20 years ending April 2015, substantially better than the broad stock market at just 9.50% per year.  

Builders took advantage of spring weather and broke ground on 389,000 (annualized) multifamily units in April, a 32% increase from March. After a long and snowy winter season kept many new projects on hold, the strong uptrend in construction from the past several years appears to be underway again.

The T-Tracker Series contains a wealth of information that should prove useful to virtually anyone who invests, analyzes or researches REITs and real estate. Detailed tables on FFO, NOI and Dividends Paid by property type, as well as spreadsheets with historical data, are available.

Real estate values and total returns retreated slightly in May, with assets in the West region of the U.S. outperforming holdings in other parts of the country.

Nearly every property sector for REITs & commercial real estate depends on sustained growth of jobs, incomes and consumer spending to drive occupancy and rent growth. The latest data indicate that the recovery in the fundamentals for REITs & real estate remains on track, despite several setbacks during the winter and early spring.

New construction of multifamily housing units slowed a bit in May from April’s torrid pace, yet remained on a rising trend. Multifamily housing starts were at an annualized rate of 349,000 units, down 18.5% from April but still well above the 300,000 unit trend that had been in place for the decade or so prior to the Great Recession. 

We often get questions about where we are in the cycle. REITs and real estate are tied closely to the macro economy’s turns through expansion and recession. While the crystal ball is never very clear about the medium-term outlook, we can make several statements about recession risks. 

If good things come in threes, then the housing market is right on track—and that’s good news for REITs and commercial real estate, too. Sales of new homes, sales of existing homes and house prices are all on an uptrend. New home sales increased 2.2% in May and are nearly 20% above a year earlier.