Yet amid this economic and physical wreckage, many Real Estate Investment Trusts (REITs) have managed to perform quite well, and in some cases have turned in stellar performances, particularly in the last two years.
So what about going forward? It turns out that is not an easy, straightforward question to answer.
"REITs are a complicated story," says Mike Grupe, an economist and vice president for research and investor outreach at the National Association of Real Estate Investment Trusts (NAREIT). Different factors are driving the different classes of property, he explains. "What's driving commercial property REITs is the economy," he explains. "We house our families in houses, but we house our economy in commercial real estate, so when the economy is doing well, commercial property REITs do well, and when the economy doesn't do well, commercial property REITs suffer."
First let's consider what REITs are, and where they fit in an investment portfolio.
REITs in one sense are simply publicly traded companies that invest in real estate and that earn money from the income on those properties. But unlike the rest of the companies in the equities markets, REITs by law are required to pass through some 90% of their profits to shareholders as dividends, making them, at least in terms of yield, similar to bonds. Investors have turned to REITS both for their yield, and because, historically, they have not shown much correlation to the equities markets, making them good alternative investments.
However, the financial crisis and resulting market crash in 2008 put a big dent in that kind of thinking. Domestic REITs lost an average of 39.6% in 2008, and globally, REITs fell a whopping 46.4% that same year, roughly tracking the losses in other equities. They also subsequently rebounded much as stocks did, with domestic REITs gaining 31.3% in 2009, and another 27.1% in 2010. Indeed, some analysts have questioning whether REITs are as "alternative" or "non-correlating" as they had been assumed to be, at least, considered a class.
For example, for the year ended March 31, the FTSE NAREIT Equity Index gained 11.29%. Over the same period, the S&P 500 Index climbed 8.54%, the Dow rose 7.24%, and the NASDAQ gained 11.16%. For the first quarter of 2012, the FTSE NAREIT Index rose 10.49%, the S&P gained 12.59%, the Dow was up 8.14% and the NASDAQ rose 18.67%. That is to say, overall, REITs, as a class, were in the same range as the various equity indexes.
That said, there is great diversity within REITs, with holdings ranging from everything from office towers, apartment buildings and shopping malls, to hospitals and biotech research labs, industrial buildings and temporary storage facilities, or even timberlands. And depending upon the particular REIT, or the REIT fund, the drivers of growth and income generation can be quite at odds with what is driving the general equities markets.
Take apartment houses. While the financial crisis and the ensuing leap in joblessness was pulling the rug out from under home prices—with record numbers of foreclosures, housing developments stopped in their tracks, and mortgages almost impossible to obtain—the apartment sector was booming. Apartment REITs during 2011 showed a gain of 15.10%, while manufactured homes, a class to themselves, rose 20.38%.
Looking at just the first quarter of 2012, apartments were up 8.54%, while manufactured homes climbed 5.41%. Also hot were health care REITs, up 13.63% in 2011 and 2.03% in the first quarter of 2012, and self-storage REITs, up 35.22% in 2011 and 4.76% in the first quarter of 2012. At the same time, though, hotels took a -14.31% hit in 2011, but recovered and rose 5.15% in the first quarter of this year, while industrial and office REITs sank 1.47% in 2011 and came back with a 4.41% gain in the first quarter of this year.
As the economy starts to show signs of recovery, and companies start to hire, that improves demand for office space, Grupe of NAREIT says. Since it takes time to bring new office building supply on line, that puts upward pressure on rents and office REIT income improves, and with that, dividends. An improving economy, and more jobs, also boosts malls, as more people start shopping again.
The apartment market, on the other hand, has seen a lift from current market conditions. "The apartment sector has benefited from the weak housing market," Grupe says. "Many families have lost their houses through foreclosure, plus with housing prices still weak and falling, it doesn't give people a lot of confidence that buying a house is a good investment, or that it's a good time to buy now. All that puts apartment housing in a better light." And again, as with office space, there has not been a lot of new apartment housing supply in the pipeline, keeping supply tight, and making it possible for apartment owners to raise rents.