REITs: A Look Back at 2018 and a Look Forward to 2019

January 3, 2019

REITs: A Look Back at 2018 and a Look Forward to 2019

Brad Case | Nareit

At the beginning of 2018 REITs were undervalued and poised for outperformance. At the end of the year both statements were still true—but less so, because the outperformance has begun.

Investors can be excused if they forget about 2018 entirely: through mid-December total returns in the broad U.S. stock market were slightly negative at -1.7 percent, while REIT returns were positive but equally forgettable at +2.6 percent. That tepid summary of the year, though, masks what I consider to be two important developments: the end of a tech stock “bubblet” and the beginning of a rediscovery of companies with more favorable valuations, including REITs.

I haven’t mentioned the role of interest rates precisely because, contrary to the market consensus, I don’t believe they played a very important role. My view is that the fact that REITs were underperforming the broad stock market, during a period when interest rates were generally rising, led REIT-focused investors to an incorrect diagnosis of market dynamics. In my opinion, the underperformance of REITs over the past two years has not been about the effect of interest rates on real estate values, but about “irrational exuberance” regarding future earnings growth for already-overvalued companies, especially tech companies.

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