Strong Fundamentals Shield REITs from Rising Rate Pressure

Real estate investment trusts (REITs) have traditionally been viewed as assets that thrive only in low-interest-rate environments, yet they are currently demonstrating resilience despite a rising rate climate. While higher borrowing costs historically suppress real estate values and pressure high-dividend stocks, experts argue that underlying market fundamentals are now strong enough to offset this headwind.

According to a recent analysis by Cohen & Steers, the correlation between REIT returns and shifts in the 10-year Treasury yield has fluctuated significantly over time, suggesting that the absolute level or direction of interest rates is no longer a reliable predictor of sector performance. Although the commercial real estate industry faced substantial challenges between 2022 and 2024—where elevated borrowing costs eroded asset values and an influx of new supply slowed rent and cash flow growth—the current landscape has shifted.

Seth Laughlin, head of real estate strategy and research at Cohen & Steers, noted that while the recent 100 basis point increase in the 10-year Treasury yield increases debt costs and forces alternative assets to compete with higher yields, real estate remains competitive. He highlighted that REIT earnings are accelerating, with growth reaching approximately 9% this year and projected to remain near 8% next year. Furthermore, the slowdown in new development caused by previous rate hikes is now serving as a benefit by limiting oversupply.

Data from Hoya Capital Real Estate supports the view that the sector is healthier than public perception suggests. David Auerbach, chief investment officer at Hoya Capital, pointed out that the correlation between REITs and interest rates has dropped to its lowest point in roughly four years. He emphasized that 58 out of 98 REITs providing full-year guidance have upgraded their outlooks.

Auerbach’s report, titled “The Rate Shock That Didn’t Break REITs,” indicated that excluding data centers, development pipelines are down significantly from their 2022 peaks and 2019 levels. Data centers remain an outlier, with pipelines seven times higher than 2019 levels. With valuations appearing attractive relative to broader equities and cash flow growth improving as new supply peaks, REIT shares have gained more than 6% year-to-date according to the FTSE NAREIT All REIT Index, underscoring the sector’s ability to withstand monetary tightening through strong operational performance.