Equity REIT stock prices have declined in 2017 despite strong commercial real estate fundamentals – positive rent growth and net absorption, and stable or declining vacancy rates in most asset classes. Many traditional equity REITs are trading significantly lower than their net asset values – they are trading at about a four percent discount to NAV. It begs the question, if real estate companies are doing well, why are their stock prices suffering? What do the markets/investors see that is contributing to this decline?
A Few Reasons for the Decline in REIT Performance in 2017
- Interest Rates
- Interest rates & the movement of treasury yields – REITS can be negatively impacted by interest rate increases (similar to fixed income). As interest rates rise, the income produced by property is worth less, resulting in declining REIT stock prices. Rental revenue does not move in concert to interest rates.
- Tighter lending standards
- Perception that property values are heated
- Most indicators suggest that we in a mature phase of the cycle – probably the 7th or 8th inning. As a result of this general observation, confidence is not terribly strong.
- FFO growth has been weak
- REIT growth declined 2017, primarily caused by substantial capital raising and low cap rates – the acquisition of properties at low cap rates brings down the overall rate of return on the portfolio. While the cost of debt has come down in parallel with the decrease in cap rates, equity remains the same – meaning, equity capital is relatively more expensive when compared to cap rates.
As you can see from the info-graphic above, data centers, infrastructure, industrial and multifamily REITs have showed positive returns. As one can imagine, given the number of big-box retailer bankruptcies in 2017, regional mall and shopping center REITs have performed the worst, while office has also performed somewhat poorly.
All Hope is not Lost, Several REIT Categories have Performed Well
- Infrastructure REITs have gained over 34% through August of this year
- Data Center REITs have posted a return of over 31% through August of this year
- Industrial REITs have delivered returns of over 19% this year