Politics provided plenty of entertainment during the quarter but looking back on the past three months, nothing much has really happened and the effect of politics on the financial markets have been ephemeral. President Trump firing FBI director Comey might have created a media firestorm and a sharp one-day drawdown in the equity markets but it may end up being a big fat “nothing burger” for the financial markets. Ditto for “Trumpcare” as the Senate’s version, fomented in secret, may not have enough Republican votes to pass and the President’s tax plan, detailed in all of one page.
Economic data released during the quarter was somewhat weak, headlined by an “advance” estimate for First Quarter 2017 GDP growth of just 0.7%, well below the consensus estimate of 1.0%. Projections have since been revised up to 1.4%, not too dissimilar to the average GDP growth of 1.9% and 1.6% in 2015 and 2016, respectively. The May nonfarm payroll number of 138,000 (compared to consensus estimates of 185,000) also proved disappointing during the quarter but again, that figure has since been revised upward to 152,000, not too dissimilar to the average of 226,000 and 187,000 in 2015 and 2016, respectively. The yield on the 10-Year Treasury Note fell for the second straight quarter from 2.396% to 2.302%.
The Wilshire US REIT Index (“Index”) was up 1.8% in Second Quarter, underperforming both the S&P 500 and Russell 2000 Indices which advanced 3.1% and 2.5%, respectively. The majority of the constituents in the Index produced positive returns (66 out of the 118 constituents). The best performing REIT, Universal Health, was up 24.4% and the worst, DDR Corp., was down 26.1%.
In terms of relative performance by sectors, Second Quarter 2017 looked very similar to the First; REIT investors continued to exhibit skepticism about the pace of economic expansion in the US and rewarded those property types that have tenancies benefitting from secular demand (primarily driven by technology) like Industrial (e-commerce) and Industrial-Mixed (data/cloud deployment). Interestingly, among the short-duration property types, REIT investors favored Manufactured Housing and Apartments over Hotels, despite well-documented concerns about the over-supply of multifamily in the high-end markets in gateway cities.
To a certain extent, Apartment REITs (as well as other “core” property types like Office) may just be benefitting from the flight of capital away from anything Retail. With the announcement of the acquisition of Whole Foods Market by Amazon for $13.7 billion during the quarter, the last bastion of safety in retail and retail real estate seemed to have been swarmed by the e-commerce horde. To some eyes, the transaction can be interpreted as a validation of well-located grocery anchored shopping centers as a viable venue for “last-mile” delivery, however, REIT investors chose to see the glass as being half empty and continued to sell all three Retail sectors.