NAREIT's headquarters. Photo by Tishman Speyer

WASHINGTON, DC–Fourth quarter 2016 FFO of listed US Equity REITs recorded a 7.4% gain compared to the third quarter of 2016 and a 20.5% gain from the fourth quarter of 2015, according to NAREIT's Total REIT Industry Tracker Series (aka its T-Tracker series). The T-Tracker is quarterly composite performance measure of the entire US listed REIT industry.

But unless you are a REIT investor or industry analyst, why should you care about this particular metric? This isn't, after all, the widely-watched quarterly or monthly REIT returns.

And the answer to that: in many ways, the T-Tracker provides a more realistic assessment of REITs and commercial real estate prices. REIT stock prices, like all stocks, can be influenced by a number of non-industry matters. The T-Tracker, by contrast, looks at REITs' earnings growth — which ultimately show whether or not value is being created.

Perhaps a more telling question is, why highlight these particular figures right now?

Because, says Calvin Schnure, NAREIT's Senior Vice President of Research and Economic Analysis, there has been concern in the industry about how much longer the current cycle can go. The Q4 T-Tracker shows, he tells GlobeSt.com, that occupancy rates are still moving up, net absorption is still exceeding supply.

“The market is still moving forward,” he says.

In fact, occupancy rates of all REIT-owned properties set a record high of 94.5% in the fourth quarter — an 81 basis point improvement from the prior quarter and a 123 basis point increase from year-ago levels.

Also, same-Store Net Operating Income (SS NOI) rose 3.6% year-over- year and was in line with third quarter 2016 growth, according to the T-Tracker. NAREIT says that SS NOI, which measures NOI generated by properties held for one year or more to factor out the effects of property acquisitions, is generally considered to be a reliable indicator of the underlying earnings of REIT-owned properties.

Calming Fears of An Oversupplied Market

These numbers all point to a real estate cycle that still has room to run, Schnure says, “with net absorption outpacing the current pipeline of new development.”

That is relief to many investors who were expecting to see stats suggesting that supply is catching up demand, according to Schnure. “People who have been through real estate cycles know that construction can get far ahead of demand very quickly — but we are not seeing that,” he says.

Net absorption is still above completions by about 20% to 30%, according to CoStar data, he says. “So based on that the cycle has another 18 months to go. Beyond that, it is hard to say what the market fundamentals will do.”

NAREIT's headquarters. Photo by Tishman Speyer

WASHINGTON, DC–Fourth quarter 2016 FFO of listed US Equity REITs recorded a 7.4% gain compared to the third quarter of 2016 and a 20.5% gain from the fourth quarter of 2015, according to NAREIT's Total REIT Industry Tracker Series (aka its T-Tracker series). The T-Tracker is quarterly composite performance measure of the entire US listed REIT industry.

But unless you are a REIT investor or industry analyst, why should you care about this particular metric? This isn't, after all, the widely-watched quarterly or monthly REIT returns.

And the answer to that: in many ways, the T-Tracker provides a more realistic assessment of REITs and commercial real estate prices. REIT stock prices, like all stocks, can be influenced by a number of non-industry matters. The T-Tracker, by contrast, looks at REITs' earnings growth — which ultimately show whether or not value is being created.

Perhaps a more telling question is, why highlight these particular figures right now?

Because, says Calvin Schnure, NAREIT's Senior Vice President of Research and Economic Analysis, there has been concern in the industry about how much longer the current cycle can go. The Q4 T-Tracker shows, he tells GlobeSt.com, that occupancy rates are still moving up, net absorption is still exceeding supply.

“The market is still moving forward,” he says.

In fact, occupancy rates of all REIT-owned properties set a record high of 94.5% in the fourth quarter — an 81 basis point improvement from the prior quarter and a 123 basis point increase from year-ago levels.

Also, same-Store Net Operating Income (SS NOI) rose 3.6% year-over- year and was in line with third quarter 2016 growth, according to the T-Tracker. NAREIT says that SS NOI, which measures NOI generated by properties held for one year or more to factor out the effects of property acquisitions, is generally considered to be a reliable indicator of the underlying earnings of REIT-owned properties.

Calming Fears of An Oversupplied Market

These numbers all point to a real estate cycle that still has room to run, Schnure says, “with net absorption outpacing the current pipeline of new development.”

That is relief to many investors who were expecting to see stats suggesting that supply is catching up demand, according to Schnure. “People who have been through real estate cycles know that construction can get far ahead of demand very quickly — but we are not seeing that,” he says.

Net absorption is still above completions by about 20% to 30%, according to CoStar data, he says. “So based on that the cycle has another 18 months to go. Beyond that, it is hard to say what the market fundamentals will do.”

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.