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The REIT Weekly – REITs Outperform S&P in May

There has been an influx of positive news in the REIT and commercial real estate sectors this past week. Increasing returns for REITs and increasing value for properties bodes well for the rest of the year. In addition, CRE loan quality is also improving.

According to Fitch Ratings, the entire REIT sector is considered “stable” for the rest of the year. This could change to positive or negative depending on leverage levels and other factors. But Managing Director, Steven Marks, commented, “Multifamily REIT fundamentals should remain the strongest and continue on a positive trajectory for ‘14, though the pace of growth is slowing.”

In keeping with the stable outlook, FTSE NAREIT All REITs Index reported a total return for REITs of 2.8 percent for the month of May, which is ahead of the 2.4 percent return for the S&P 500 Index. While Apartment REITs are cited as doing especially well, all REIT sectors are beginning to improve. Jeff Langbaum, REIT analyst for Bloomberg Industries observed, “It’s another positive month, continuing the upward trend of the year.”

Green Street Commercial Property Price Index has increased by 2% during the month of May. According to the article, cap rates are getting lower and capital appreciation is improving. Green Street’s CPPI measures private-market value for REIT portfolios in five major sectors, including multifamily, industrial, mall, office, and strip retail. “It’s likely the trend continues. Real estate pricing currently looks attractive relative to bond yields.” commented Peter Rothemund, an analyst at Green Street.

With the property prices, commercial real estate (CRE) loan quality is also improving. Delinquincy rates for commercial and multifamily mortgage loans declined during the first quarter of 2014. “The last two quarters marked the largest percentage point declines in CMBS delinquency rates ever,” said Jamie Woodwell, Mortgage Bankers Association’s vice president of commercial real estate research. Woodwell continued, “We also see continued improvement in the performance of commercial mortgages held by banks and very low delinquencies in loans held by life insurance companies and the GSEs. With property incomes and values rising, loan performance should continue to benefit.”