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As interest rates hover near lows, and investors search for anything with yield, commercial real estate is finding its footing.

Low rates boost REITs, commercial real estate stocks

As interest rates hover near recent lows, and investors search for anything with yield, commercial real estate is finding its footing yet again, outperforming the broader U.S. stock market.

Stock exchange-listed U.S. equity real estate investment trusts were up 16.25 percent, with a dividend yield of 3.52 percent, in the first half of 2014, according to the National Association of Real Estate Investment Trusts. These results compare to the S&P 500 index first-half 2014 total return of 7.14 percent and a dividend yield of 2 percent.

“The outperformance compared to the S&P 500 index came from REIT sectors representing a broad range of U.S. economic activity, and was supported by good supply and demand balance in commercial real estate markets around the country,” said NAREIT President and CEO Steven A. Wechsler.Commercial real estate has been recovering at a fast clip, led by multifamily apartment demand, self-storage and even some strength in regional malls. Office is improving in major urban markets, but is still hampered by employers who may be hiring more workers but who are downsizing their footprints, using less space per worker.

The real driver for REITs today is the low interest rate environment.

“That has really been a big tailwind for the group,” said Steve Sakwa of ISI Group. “Low interest rates are a positive for REITs because they really offer investors an attractive yield alternative relative to Treasurys or fixed income and you have a growth characteristic to that dividend yield that will go up and increase versus kind of a fixed return over a period of time.”

Sakwa is still being conservative on his forecast, as are other analysts who still believe interest rates will rise and take a bite out of REIT returns.

“I think we are going to see a pullback,” said David Toti of Cantor Fitzgerald. “I think in the near term there’s some potential weakness, but our view at this level, real estate is fairly valued.”

Analysts had been concerned last year about the hottest REIT sector—multifamily rental apartment buildings.

Article by:

Diana Olick | @diana_olick

Friday, 8 Aug 2014 | 11:51 AM

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