REIT-Stock Correlations by Property Type: A Sharp Decline
October 18, 2017 | Brad Case | REIT.com
The correlation between REITs and the broad stock market has always been relatively low, because REIT returns are driven by the real estate market cycle whereas returns for most other equities are driven by the much shorter business cycle. I’ve noted in previous market commentaries that the REIT-stock correlation has recently been especially low, so I thought I would dig a little more deeply into how closely REITs in different property type sectors have been correlated with stocks.
I’ll focus on 10 sectors or subsectors for which monthly returns are available back to the beginning of 1994: Self Storage, Manufactured Homes, Health Care, Free Standing Retail, Regional Malls, Shopping Centers, Apartments, Industrial, Office, and Lodging/Resort.
Self Storage
Chart 1 shows the correlation in monthly total returns between Self Storage REITs and the broad U.S. stock market. This chart illustrates an important point that you’ll see in several other sectors, too: REIT/stock correlations reached their peak not during the liquidity crisis—in fact, the correlation between Self Storage REITs and the broad stock market stayed in the 40% range throughout the Great Financial Crisis in late 2008 and early 2009—but rather in October 2011 when both of them had especially good returns (+16.64% for Self Storage REITs, +11.51% for the broad stock market). Even at its peak the correlation was just 59%, but since then it has declined sharply: as of September 2017 it was just 33%, down 26 percentage points from its highest value and 5.7 percentage points below its average value (39.0%) over the available historical period.
