Historically, REITs have been sensitive to interest rate changes, as they are high-dividend stocks that benefit from lower rates. However, a report from Cohen & Steers indicates that current real estate fundamentals are more significant than the impact of rising rates.
Higher interest rates have indeed pressured the commercial real estate sector from 2022 to 2024, leading to decreased asset values and slowed cash flow growth due to increased borrowing costs and new supply. Seth Laughlin from Cohen & Steers noted that while the cost of debt has risen, the demand for better yields has made real estate an attractive alternative.
Earnings growth for REITs is projected at around 8% for the coming year, with cash flow improving as new supply peaks. Notably, correlations between REIT returns and interest rates are at their lowest in four years, suggesting that fundamentals are driving performance.
David Auerbach from Hoya Capital Real Estate highlighted that 58 out of 98 REITs have raised their full-year guidance, indicating robust fundamentals despite the headlines. Year-to-date, REIT returns have increased over 6%, with sectors like hotels, data centers, and senior housing performing particularly well.
Conversely, multifamily apartment REITs are struggling due to oversupply, but demand is expected to rise as homeownership becomes less affordable. Overall, the health of the economy and strong property-level cash flows are helping REITs navigate the current rate environment