REITS, Rising Rates and the Real Estate Cycle

REITS, Rising Rates and the Real Estate Cycle

January 2016


The five most relevant trends to REIT values and the real estate market this cycle suggest that REIT investors may benefit from a slow tightening cycle with moderate growth, lower long term interest rates, supportive spreads to debt costs and modest levels of new development.

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Executive Summary

In 2015, REIT shares experienced elevated volatility due largely to ongoing uncertainty about the timing of an increase in the Fed Funds rate and investor worries that higher rates would disrupt the economy and real estate markets.1 While the Federal Reserve’s December rate hike announcement clarified US interest rate policy, real estate markets and REIT share prices are driven by a multitude of underlying factors, of which interest rate policy is only one. In addition, real estate cycles are not identical and the factors that most influence them change as our economy changes. In this paper, we highlight the five most relevant trends to REIT values and the real estate market this cycle, and propose that REIT investors may benefit from a slow tightening cycle with moderate growth, lower long term interest rates, supportive spreads to debt costs and modest levels of new development.

We believe the five most important factors relevant to REITs this cycle2 are:

1. Real estate may benefit from its correlation to overall economic growth;

2. Conventional wisdom regarding REITs, bond yields and Fed tightening may create an oversold condition for investors to exploit;

3. Modest supply coupled with growing demand supports the outlook for solid fundamentals;

4. Healthy yield spreads should insulate property valuations from modest increases in bond yields; and

5. Millennials, a bifurcated economy and urbanization trends create compelling return potential for discerning investors. 


1 Shown by a widening in corporate credit spreads during the “Taper Tantrum” of 2013 and the “Fed Lift Off” of 2015.( See Figures 4 and 5 in the full report.)

2 In this paper, “the cycle” represents the current real estate cycle. In general, a real estate cycle can be defined by four distinct phases of recovery, expansion, hyper supply and recession. Historically, the length of the real estate cycle has varied significantly, however it is generally considered to take 7-15 years for a real estate cycle to complete.

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