Picking up where they left off last year, U.S. equity REITs continued to post strong returns in the first quarter of 2011, outperforming broader market indices despite a late-quarter slowdown that softened returns on investment trust stocks in March, according to new figures from NAREIT.
The gains appear to reflect investor expectations that market fundamentals will continue to improve across all sectors of commercial real estate — including an anticipated deepening of the nascent office sector recovery to include suburban and some second- and third-tier office markets assets.
The FTSE NAREIT All Equity REITs Index, which covers 120 investment trusts with an implied market capitalization of $417.7 billion, rose 7.50% in the first quarter, easily outpacing the Standard & Poor’s 500, which rose at 5.92% in the first three months.
The quarterly gain improved despite a weaker month in March for property company shares resulting in part from investor concerns over macroeconomic impacts from higher oil prices and Mideast conflicts, slow job growth, the Japan disasters and signs of rising inflation. The index, compiled by the National Association of Real Estate Investment Trusts (NAREIT), dipped 1.28% last month, led by a monthly decline in hotels (-3.89%).
Overall, however, office and industrial REITs collectively showed the strongest gains in total returns in the first quarter at 8.5%. Office REITs posted returns of 7.6% while industrial companies returned 11.2%. Mixed office/industrial REITs such as Duke Realty showed a 7.7% gain.
While positive absorption has finally returned to the national office market, the recovery has been uneven so far. Solid occupancy and rent growth is still mostly limited to quality assets in the major gateway and coastal markets, as evidenced by rising Class A office rents in Manhatten in the first quarter of 2011, according to Chris Macke, senior real estate strategist for CoStar Group.
“REITs are benefitting from strong investor interest due to the continuing search for yield in a yield-starved environment, as well as from the trading up that is occurring from Class B buildings to Class A buildings,” Macke said.