The analysts expect rates in both the 10-year yield and in the average BBB corporate bond yield to increase by about 50 basis points over the course of the year, to 3.0% and 4.3%, respectively. “The REIT industry is likely already pricing in a ~20 bps increase as the spread between the trailing twelve month FFO yield and the BofA Merrill Lynch US Corporate BBB effective yield is 131 bps compared to the trailing seven-year average of 114 bps.”

Within the broader REIT universe, RBC's analysts have the highest performance expectations from the communications infrastructure, industrial, multifamily and office sectors. Industrial is benefiting from “strong macro trends including consumer consumption, world trade and the modernization of supply chains,” while for office, “a solid employment picture combined with a manageable supply outlook supports healthy organic trends.” Multifamily fundamentals should rebound as supply pressure abates, the analysts write, “particularly if Trump's pro-growth policies are enacted.”

The RBC team gives a “market weight” weighting to REITs in the community sector, hotel and triple-net lease sectors. Community centers, in their view, enjoy “higher exposure to more Internet-resistant tenants,” while the NNN sector “still appears well positioned to source and complete accretive investments, although the analysts see “incremental pressure on stock prices.” On lodging REITs, “the strong dollar and soft citywides keep us cautious for now.”

The analysts are even more cautious about healthcare, mall and storage REITs, giving all three an “underweight” ranking. For the former in particular, “The potential change in the direction of healthcare reform adds a new layer of uncertainty and the expected acceleration of seniors housing deliveries keeps us cautious on the space.” RBC sees more pressure from e-commerce on mall REITs, while the self-storage space faces “near-term deceleration” after years of growth.

CLEVELAND—Despite a rapid uptick in 10-year Treasury rates, REITs delivered “largely stable” performance in 2016, and RBC Capital Markets analysts are expecting another year of healthy returns in 2017. They're anticipating that the MSCI US REIT index will close the year at 1,200, based on a total return of 8.5%.

RBC's outlook is based on “a solid economic backdrop with GDP growth trending modestly higher at 2.3% compared to 1.6% for the first three quarters of 2016, and long-term interest rates moving higher,” according to the firm's report. “We note GDP growth has accelerated throughout the year, and the new administration appears poised to implement more pro- growth policies compared to the current administration,” RBC's analysts write. They assume an increase in yields on funds from operations of 10 basis points despite an expected 50-bp increase in interest rates.

The analysts note that interest rates today are still approximately 200 bps lower than they were in 2005 and 2006 on both the BBB corporate and 10-year US Treasury. Additionally, the industry by and large has “higher quality portfolios and lower leverage” compared to the peak of the previous cycle.

“We expect the spread between the REIT FFO yield and the average BBB corporate bond yield will drop below the historical average and closer to the average spread set for the first three years of the recent economic upswing,” RBC's analysts write. “We believe the lower spread is warranted as the REIT industry should drive stronger earnings growth if the economy improves.”

The analysts expect rates in both the 10-year yield and in the average BBB corporate bond yield to increase by about 50 basis points over the course of the year, to 3.0% and 4.3%, respectively. “The REIT industry is likely already pricing in a ~20 bps increase as the spread between the trailing twelve month FFO yield and the BofA Merrill Lynch US Corporate BBB effective yield is 131 bps compared to the trailing seven-year average of 114 bps.”

Within the broader REIT universe, RBC's analysts have the highest performance expectations from the communications infrastructure, industrial, multifamily and office sectors. Industrial is benefiting from “strong macro trends including consumer consumption, world trade and the modernization of supply chains,” while for office, “a solid employment picture combined with a manageable supply outlook supports healthy organic trends.” Multifamily fundamentals should rebound as supply pressure abates, the analysts write, “particularly if Trump's pro-growth policies are enacted.”

The RBC team gives a “market weight” weighting to REITs in the community sector, hotel and triple-net lease sectors. Community centers, in their view, enjoy “higher exposure to more Internet-resistant tenants,” while the NNN sector “still appears well positioned to source and complete accretive investments, although the analysts see “incremental pressure on stock prices.” On lodging REITs, “the strong dollar and soft citywides keep us cautious for now.”

The analysts are even more cautious about healthcare, mall and storage REITs, giving all three an “underweight” ranking. For the former in particular, “The potential change in the direction of healthcare reform adds a new layer of uncertainty and the expected acceleration of seniors housing deliveries keeps us cautious on the space.” RBC sees more pressure from e-commerce on mall REITs, while the self-storage space faces “near-term deceleration” after years of growth.