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While The Stock Market Takes A Beating, REITs Weather The Storm

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Though publicly traded real estate companies have been unable to escape the tumultuous swings in the stock market, equity REITs have outperformed the broad stock market. 

Wall Street, NYSE stock market

Markets appeared to be on the rebound from last week’s volatility during early morning trading Monday, but trading reversed and major indexes closed in the red, with the Dow Jones dropping 245 points by the closing bell. 

Last week the S&P 500 slipped toward correction territory — when an index falls 10% or more from its recent high — plummeting as much as 9% Friday, while the Nasdaq fell 2.1% during the same period. Month-to-date, the value of the Dow is down 6%, the S&P 500 is down 4.7% and the Nasdaq has dropped 10.3%, MarketWatch reports, putting it in correction territory.

Experts attribute weakness in the market to concerns about both U.S. and global gross domestic product growth, trade war tensions and fears that corporate earnings have peaked, MarketWatch reports.

While real estate stocks have been hit by October’s volatility, REITs have been weathering the storm relatively well in comparison. 

As of Friday’s close, FTSE Nareit All REITs Index — which tracks 226 equity and mortgage REITs in the U.S. with an equity market cap of $1.13 trillion — was down 3.87%, while the S&P 500 was down 8.67%. Monday, FTSE Nareit All REITs closed up 1.34% compared to the S&P 500's 0.66% drop.

“It hasn’t been a great time for REITs, but this is a situation where you’re sure glad you’re in REITs as opposed to the rest of the market,” Nareit Senior Vice President of Research and Industry Information Brad Case told Bisnow

REITs experienced weakness in the beginning of the year, which experts attributed largely to investors rallying behind large-cap growth stocks like tech giants Facebook, Apple, Amazon, Netflix and Google parent Alphabet — all of which are traded on the Nasdaq and account for a market cap of more than $3 trillion combined. But recent volatility and huge pendulum swings in major indexes suggest a correction is on the horizon. Current volatility, coupled with the exorbitant value of tech shares, greatly resembles the late 1990s when investors were going crazy for tech stocks, Case said. 

“Most of the strength in the stock market has been in tech stocks, and most of that was in the first two months,” Case said. “Actually, since the end of February the REIT market has outperformed tech stocks by 7.36%, according to the S&P 500 Information Technology index.” 

When comparing REIT performance to small-cap value stocks, which are companies with a market cap that falls between $300M and $2B, the industry has outperformed. REITs, which are most similar to small- and mid-cap stocks, outperformed both since February by 8.96% and 12.35%, respectively, according to data compiled by Nareit. 

Investment activity in the U.S. commercial real estate market remains robust, with the industry riding the coattails of the country’s strong economy. Deal volume rose 4% in the first half of 2018 compared to last year, a modest increase that reflects a resurgence in investment activity after deal volume dropped off in seven of the eight previous quarters, according to a midyear Colliers International report

GDP in the third quarter hit an annual growth rate of 3.5%, a slight dip from the 4.2% growth rate experienced in Q2. This bodes well for the commercial real estate industry, as it continues to exceed expectations in terms of investment sales activity.

“Just released, U.S. GDP grew by 3.5% in Q3. Stock market is all over the place last two weeks, but I would remind that we have had several corrections in this cycle and none of them have altered the trajectory of #CRE. The economy is what matters, and that is strong,” Cushman & Wakefield Global Chief Economist Kevin Thorpe tweeted Friday morning.