The investment trusts, usually the stalwarts of the commercial real estate industry, are seeing their stocks dip to their lowest points since 2008. This comes after a six-year period when they performed exceptionally well, jumping nearly 350 percent during that time.
What’s quizzical about this development is that the commercial real estate industry is experiencing a major rebound. REITs are apparently suffering due to concerns about the economic problems taking place in China and the possibility of rising interest rates.
A leading REIT index is down 9.4 percent so far this year after shooting up 30 percent last year. In contrast, S&P 500 stocks have only dropped 5.4 percent in 2015.
Simon Property Group, the largest retail owner in the country, recently saw its stock close around $175, down from a high of over $200 at the end of January. Developer AvalonBay Communities also saw its stock dip by around $20 per share over the last couple of months, and it’s now hovering just above $160.
Even though the stock prices are down, savvy investors are gobbling up assets, portfolios and whole companies. For example, Strategic Hotels & Resorts is getting bought by private-equity firm Blackstone Group.
And several major markets are seeing commercial real estate values and transaction prices go through the roof. The Bay Area market is on fire right now. We are also seeing strength in Southern California’s Inland Empire, various Miami commercial real estate properties and Denver is also very successful, among other major metro markets. The fundamental drivers in all of these places are very strong.
So, the stock market continues to remain a mystery when it comes to commercial real estate. The bump in interest rates by the end of the year is expected to be minor, and economic problems overseas are pushing more foreign capital into assets across the country, especially in gateway markets.
One would think that investors will soon wise up to the fact that commercial real estate is a not big investment risk and start putting their money into REITs again, seeing that they own the cream-of-the-crop properties across CRE sectors.