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Real estate investment trusts have emerged as a safer haven for investors as the broader stock market stumbles through volatility.
Since January, the FTSE Nareit All Equity REITs index, which covers 132 firms, posted total returns of 2.22 percent for the quarter as of Monday. The performance is fueled by exceptionally strong demand for data centers and health care properties.
Meanwhile, the S&P 500 is down 7.05 percent over the same period, and the Dow Jones Industrial Average is down 5.54 percent.
Equity REITs are faring better than mortgage REITs, as borrowing costs continue to rise amid the Middle East conflict. Nareit’s mortgage REIT index, which looks at 32 companies, was down 5.52 percent over the same period.
“Generally they’ve had really strong operating performance and the fundamentals in a number of the property sectors where they operate continue to be quite strong,” said John Worth, executive vice president of research and investor outreach at Nareit, which is an industry organization.
At the end of last year, net operating income across REITs was up year over year by more than 6 percent, and about three-quarters of REITs reported yearly growth in NOI, according to Nareit data. REITs also had a low leverage ratio of 36 percent.
As for specific sectors, data center and healthcare REITs continue to outperform the broader industry. Both are benefitting from strong demand and for healthcare, an aging population, Worth said. Data centers were the quarter’s top performers, with total returns climbing nearly 21 percent. Health care REITs are up 4.4 percent.
Investors also turn to REITs as a diversification strategy in a time of economic and geopolitical uncertainty.
“They’re playing that role today, where they tend to be a little more immune to potential macroeconomic shocks,” Worth said. “When you see that outperformance, especially over the last month, part of that can be attributed to that diversification benefit.”
The war with Iran has already caused financing costs to escalate, and the potential for ripple effects throughout commercial real estate is a cause for concern.
REITs are “certainly not immune to the environment,” said Ed Pierzak, senior vice president of research and investor outreach at Nareit. “But given their balance sheets and their operational performance, [they are] well insulated.”
Not all REIT sectors performed well in the first quarter.
Office REITs, still struggling mightily with high vacancy rates and changes in use, performed the worst, posting negative returns of more than 18 percent quarter to date. The rise of AI and layoffs in the tech industry also is hurting demand.
The picture is more nuanced. REITs tend to own high-quality offices, with premier amenities, in top markets, and those properties tend to continue to perform well, Pierzak said
Residential REITs, which include companies that specialize in apartments, manufactured homes and single-family homes, were also in the red, down 7 percent. The apartment sector, in some parts of the country, is still facing a supply glut and falling rents. And for single-family rentals, pricing pressures and President Donald Trump’s rhetoric around the institutional ownership of homes has led to some concern for the sector, according to some analysts.