Real Estate Investment Trust indices underperformed the S&P 500 in the first quarter of 2012, but during the 12-month period ending March 31, 2012, REITs outperformed the market, according to first-quarter data from the National Association of Real Estate Investment Trusts. Industrial REITs lead sector-specific returns, while retail, lodging/resorts, and timber REITs all posted solid returns.
Over the 12-month period ending in March, the FTSE NAREIT All Equity REITs Index and FTSE NAREIT All REITs Index’s total returns were 11.3 percent and 10.9 percent, respectively, while the S&P 500’s total return was 8.5 percent. In the first quarter of 2012, however, the S&P 500’s total return of 12.6 percent outpaced both REIT indexes.
The numbers are reason to be cautiously optimistic, according to Jim Connor, senior executive vice president for Duke Realty.
“Prices are up, and most people believe that the fundamentals of our business are improving across the board,” Connor said. “The only thing that is holding us and our stock prices back is the overall global economy. Every time there is a setback in Europe or China, the stock market seems to get a little skittish.”
Industrial REITs led the industry in first quarter return performance, delivering a total return of 23.61 percent. Among other major equity REIT market sectors, retail provided a 14.56 percent total return, led by regional malls with a total return of 15.17 percent. The office sector returned 10.67 percent and residential REITs returned 8.49 percent. Among other sectors of the equity REIT market, lodging/resorts returned 13.49 percent and timber REITs returned 12.01 percent for the quarter.
Meanwhile, the first three months of 2012 marked the seventh consecutive quarter of positive growth in industrial demand, according to NAIOP.
Demand for industrial space is expected to grow at an annualized rate of 1.14 percent in the second quarter of 2012, according to a NAIOP forecast released on May 10. The association is projecting more robust demand growth isn’t expected until later in 2012.
“Demand for industrial is very much tied to the overall economy,” said Thomas Bisacquino, NAIOP’s president and CEO. “Although still small, it’s encouraging to see some positive growth in the industrial markets.”
Bisaquino said the industrial sector‘s first quarter growth of 1.11 percent was within the normal range of 1 percent to 2 percent per year. He said the growth was consistent with GDP growth despite being below long-term quarterly averages.
“It is evident that the industry won’t return to more normal rates of growth until the U.S. and global economies stabilize,” Bisaquino said.
Scott Musil, chief financial officer at First Industrial, said fundamentals in the industrial market are starting to come back.
“I think people see that industrial REITs are turning the corner and they’re starting to get positive growth out of their same-store portfolios,” he said. “There’s also been a fair amount of absorption in the market and there hasn’t been a lot of new development. There has been some new development, but it’s primarily in some of the stronger markets.”
REITs continued to raise capital, including a significant amount of equity, in the first quarter, according to NAREIT. Capital raising from the public markets by REITs over the past three years has produced an industry of companies with strong balance sheets and the flexibility to make acquisitions.
“A lot of people still believe that REITs are a good investment,” Connor said. “They believe that the macroeconomic drivers behind the REIT business are positive. You’re going to continue to see growth not only in rents, but growth in portfolio and asset base. You’ve also got real estate as a hedge against inflation. I think those are a lot of the drivers that will continue to keep investors focused on REITs.”
In the first quarter of 2012, publicly traded U.S. REITs raised a total of $21.2 billion in capital, including $10.6 billion in equity. By comparison, REITs raised a total of $51.3 billion, including $31.1 billion in equity, in all of 2011, which was the industry’s record year for both total capital and equity capital raised. At Dec. 31, 2011, the debt ratio for the U.S. equity REIT industry (the industry’s total debt as a percent of its total debt and equity market capitalization) stood at 38.6 percent, down from 39.8 percent a year earlier and at or below its historical average.
“REITs are well capitalized and well prepared to make strategic acquisitions in 2012,” said Steven A. Wechsler, NAREIT’s president and CEO. “Those opportunities are likely to present themselves this year, as $20 billion in five-year commercial real estate loans made at the peak of the last real estate cycle come due – many of which will have difficulty being refinanced.”
Musil said many REITs will be focusing on high-quality assets in top markets.
“We’re looking to grow our portfolio. Our main goal over the next couple of years is to sell off the bottom 10 percent of our assets and buy really high quality assets,” he said. “It’s very competitive, however. A lot of folks, including us, are focusing on high quality assets in high quality markets, and as a result, pricing is getting a little tight. For those stronger markets, you may see a little bit more development because you’re able to get a little bit higher return than doing an acquisition.”
