Do June's Results Show REITs Are On The Way Up?

Will the potential for lower interest rates might lead to a better second half the year for real estate investment trusts (REITs). Equity REITs are already showing signs of increasing strength, and one sector is looking better than ever. 

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The FTSE Nareit All Equity REITs Index for June was up by 2.2%. While this is encouraging, it's important to note that REITs are still underperforming the broader market. The Nasdaq continued to shine with a return of 6%, while the S&P 500 was up 3.6%, and the Russell 1000 was up 3.3%. However, REITs did outperform the Dow Jones Industrial Average, which inched up 1.2%. Taking the longer view, the index shows that REITs are down 2.2% for the year so far.

Sectors To Watch

REIT performance varies widely by sector. So far this year, industrial REITs, which had an impressive 19.2% total return last year, are down by 12.8%. Industrial REITs have enjoyed rising rents and demand for the past several years as many companies adjusted to the global shipping crisis by either storing more goods locally or bringing manufacturing closer to home. 

The slowing of this trend may be temporary bad news for large industrial REITs like Prologis PLD, which lowered its occupancy guidance from 96.5%-97.5% to 95.8%-96.8% for the full year. Those are still strong numbers, but they do indicate that we may see a period of weakness as oversupply becomes a concern in the short term. Founded in 1983, Prologis operates over 1.2 billion square feet of space in 19 countries and counts Amazon AMZN as its top customer. Prologis has seen its price fall by nearly 15% year to date as it waits for the market to absorb industrial warehouse supply. However, its 3.3% dividend yield should reward patient investors holding the stock. 

A thriving sector currently includes residential REITs driven by apartment REITs. So far this year, the total return for residential REITs was up 5.8% in June and the apartment REITs were up 6.7%. For the year, residential REIT total returns grew by 7.9% and apartment REITs rose by 12.3%. One major tail wind here is the ongoing pressure on the housing market. With existing home prices up 5.8% in May and inventory remaining below historic levels at a 3.7 months supply, many people are still opting to rent instead of buy. 

This may be good news for apartment REITs like Camden Property Trust CPT, which operates 171 apartment communities and has over 58,000 units with a high concentration in the desirable Sunbelt region. Camden has an average occupancy rate of 95%. On its most recent earnings call, the company indicated a slight slowdown in turnovers from 36% to 34%. One problem facing multifamily operators is that while rents have risen dramatically over the past several years, they have fallen by as much as 21% in some areas. The challenge for apartment REITs will be balancing rent increases and occupancy rates. Camden's price has risen around 7% this year and has a healthy 3.8% dividend yield. 

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When The Rate Cuts Come

The market is starting to consider the timing of interest rate cuts. This may be a double-edged sword for some REITs, especially those in the apartment sector. For office REITs struggling with heavy debt, this may present a window of opportunity for refinancing.

 If debt becomes more affordable, some REITs may take advantage of better terms and acquire properties. This could spark greater overall liquidity within commercial real estate. For the first quarter of 2024, commercial real estate transactions continued to plummet, hitting the lowest rate since 2013. With the market looking forward to at least one rate cut, perhaps as soon as September, now is an interesting time to watch REITs.  With an earnings season between now and then as well as plenty of economic data to consider, it's important to remember that there are many factors that may contribute to the returns on individual REITs. 

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