REITs’ Lagging Performance More Related to Overall Equity Markets

REITs’ declining performance this year is more likely a product of the broader equity markets, the Federal Reserve and geopolitical risks than internal factors, according to a report this week from JLL.

Like the equity markets, REITs are off 20 percent year-to-date and are coming off one of their best performing years ever. 

JLL said the bigger trend is that REIT trading prices continue to be “further and further disassociated from real estate values.”

Longer Term, REITs an Outperformer

Market participants have focused on near-term underperformance though REITs have outperformed on a longer-term basis, according to the report.

Since January 2021, REITs have beaten the S&P 500 by more than 14%, driven by 43% total shareholder returns achieved by REITs during the year. 

Self-storage and industrial sectors led the outperformance, up 59% and 45%, respectively, in 2021.

Steve Hentschel, Head of the M&A and Corporate Advisory Group within JLL Capital Markets, said in prepared remarks, “There is an ever-larger correlation of REIT trading performance with broader equity markets, currently 92% compared to the S&P 500 on a rolling three-month basis, which is exacerbated by the proliferation of quant driven trading activity and the advent of passive equity investors, like index funds, in the REIT space.

“The correlation has been even more pronounced during periods of extreme volatility such as the Global Financial Crisis and COVID-19, and we are also seeing it today.”

REITS Have ‘Tremendous Growth Prospects’

Hentschel added that although current cap rate yields are tighter than they have been compared to fixed income yields, “it is important to factor in the tremendous growth prospects for REITs, which are projected to generate 20% average same store NOI growth over the next three years.

“The fundamentals still support positive longer-term outlook for REITs despite the volatility in the capital markets today.”