US REITs Have Rough 1st Quarter

Despite a slight rally yesterday (Monday), equity REITs posted a 32% decline in the 1st quarter (FTSE NAREIT Equity Index). In March, REITs were up about 4%.

Shopping center and Industrial REITs were the worst performing sectors, each declining about 41% in the quarter. Manufactured housing was the best performing sector, declining just 2%. Manufactured housing is viewed as a more “recession proof” sector, which could benefit as people trade down to less expensive rentals.

We expect continued volatility in REITs over the next couple of months due to commercial real estate fundamentals, which are falling in most property types. If you jump into the sector, make sure you are diversified and only buy companies that have enough liquidity to roll over 2009 debt.

Going forward, our favorite sector in 2009 is Apartments and our least favorite is Office. Apartment owners will benefit due to a growing pool of potential renters and lower turnover. Office landlords are struggling due to the lack of corporate expansion; many companies are reluctant to take on new space until the economy improves.

Office vacancies are increasing in most regions in the U.S. Among our buys are apartment REITs, Equity Residential (EQR) and Mid-America Apartments (MAA), two REITs with minimal 2009 debt maturities and attractive valuations.

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