American REITs are forecast to suffer their worst decline in almost ten years and could drop up to 20% within the next year, Bloomberg reported Thursday. Economists cited by the New York Times estimate that problems in the mortgage markets could ultimately cost financial firms and investors up to $400 billion. REIT stocks have outperformed the S&P 500 every year since 2000, but are expected to suffer as higher borrowing costs put the brakes on takeovers and slash property values. "REITs are overvalued by 25-40% relative to stocks and bonds, and cash flow yields are too low," said University of California economist Kenneth Rosen. Investors are steering clear of bonds backed by subprime and commercial mortgages, and their reluctance to lend is affecting the value of trusts that own commercial properties, apartment complexes, hotels, shopping centers and mortgages. The Bloomberg REIT Index has fallen 16.5% since the Blackstone Group bought Equity Office Properties Trust for $39 billion including debt. Bloomberg notes that the last time the Index sank more than 10% was in 1998, when investors were pouring money into Internet stocks. The only segment of the Index not to lose value this year is warehouse and industrial, which rose 11.5%. Public storage REITs suffered most with a 19% decline. "There is plenty more shakeout to go in the REIT market," said American Century Investments fund manager Jeffrey Tyler. "Property values are going to be under pressure, and by extension that will move to REITs."
Commentary: REITs vs. Treasury Yields: Something Has To Give • Equity REITs Still Significantly Overvalued • Real Estate: How Far, How Fast?
Stocks to watch: RWR, VNQ