With a drop of 9.0% for the third quarter, the SNL Equity REIT Index is only up 3.6% year to date, although this compares favorably to the S&P 500 Index, which is down 17.3% for the third quarter and down 28.2% year to date.
The most salient feature of the real estate landscape through the middle part of this year has been the continued slowdown in fundamentals. FFO growth and same-store NOI were weaker than expected for the second quarter, leading to doubts that REITÂ's would be able to sail through the shoals catching the rest of the economy.
Early on, hotels, offices and apartments were the slow sectors, having suffered in the wake of September 11 and the concurrent erosion of the various sectors of the New Economy. Fundamentals in hotels and office REITÂ's continue to be affected by uncertain corporate earnings and employment growth. Apartments suffered from the additional irritant of low mortgage rates, which have lured more erstwhile renters into home ownership, even as the slowing economy led fresh college graduates to stay at home with parents or to double up on roommates.
The disaffection for all three of these sectors was resoundingly confirmed this quarter, as they exhibited double-digit drops in total return exceeded only by the specialty REITs.
While office, multifamily and hotel REITs all suffered from specific aspects of the economic slowdown, retail REITs had been holding up well, due primarily to sustained consumer confidence.
The top tiers are still retail sectors, although even there, negative total return numbers have appeared as well. Indeed, the only group to show a positive number this quarter is the small collection of outlet center REITs.
High levels of personal debt, anxiety over job safety, as well as the looming possibility of war with Iraq, have all abraded the previously solid foundation of consumer sentiment that has supported retail REITs.
Finally, the dismal performance of the broad market - wracked by continuing accounting and executive compensation controversies - has negatively affected consumer confidence as well, which in turn has threatened to slow retail activity and thereby erode the earnings of retail REITs.