Michael Grupe, executive vice president of research and investor outreach at NAREIT, says that the REIT markets have gone through typical seven-year cycles of growth and decline, usually because of oversupply and market quirks like the late 1990s' tech bubble, which he says sucked all the oxygen out of hard assets like real estate. He believes that the roots of the last REIT decline actually started a year before the 2008 collapse of Lehman Brothers and the cyclical problems were obscured under the cloud of bank chaos.
"There was a two-step decline in the financial crisis," he says. "The initial decline represented typical weakness similar to the past representing fundamental weakness in the economy. The second was about the credit market freezing as a result of the crisis. [REITs] have recovered from March 2009, but they have not fully recovered because there is still economic uncertainty related to the economy."
That brings us to the current market debacle. If the whirlpool is sinking all boats, that might be unfair to REITs, which analysts think are in better shape than the market would suggest. Halle says that in a volatile market, REITs' long lease maturities and lower debt make them good defensive plays.
"An important difference between now and 2008 is that many public REITs have significantly delevered their balance sheets, increased coverage ratios and staggered debt maturities," Halle says. "In 2011, the companies, and real estate fundamentals, are stronger and healthier. We expect the risks of dividend cuts, forced balance sheet deleveraging or impairments should be greatly diminished in the event of a further downturn in the equities market."
Martin says that the REITs' yields and payout ratios will offer some downside protection if prices fall and says that a study he's working on suggests that they outperform in periods of low GDP and low interest rates. He also thinks the recent downturn has shaved down valuations enough to make REITs even more attractive from a yield standpoint.
"It's providing opportunities," he says of the August maelstrom. "I want to wade back in. Up until a couple of weeks ago, the REITs in our opinion were trading 15% to 20% above fair value. Many of them have come back to trading at or below fair value."