Cohen & Steers Report: Why REITs Are Thriving Despite Higher Interest Rates

Correlations Between REIT Returns and Treasury Yields Shift

Correlations between real estate investment trust returns and changes in 10-year Treasury yields have shifted over time, cnbc.com reported in a Property Play newsletter analysis. The level or direction of interest rates alone no longer serves as a reliable predictor of performance for the sector.

Higher interest rates certainly hurt commercial real estate between 2022 and 2024. Elevated borrowing costs lowered asset values while new supply in several sectors caused rent and cash flow growth to slow down.

Certainly 100 basis points in the last year on the 10-year [Treasury] is an impingement to the cost of debt and does also mean every other asset class now has to compete with higher yields.Seth Laughlin, Cohen & Steers

Seth Laughlin, head of real estate strategy and research at Cohen & Steers, noted that alternative investments require better yields in the current environment. At the same time, earnings are accelerating up to 9% this year and roughly 8% next year.

REITs Raise Outlooks as Cash Flow Growth Improves

New property supply is peaking while cash flow growth improves and valuations stay attractive relative to equities. REIT-to-interest-rate correlations sit at their lowest level in about four years, according to David Auerbach, chief investment officer at Hoya Capital Real Estate.

Auerbach wrote in a report titled The Rate Shock That Didn’t Break REITs that 58 out of 98 real estate investment trusts providing full-year guidance raised their outlook. Property-level cash flows, earnings visibility, dividend coverage, and better balance sheets are helping absorb rate shocks.

Excluding data centers, development pipelines for the sector sit roughly 40% below 2022 peaks and 2019 levels. Data centers remain the exception at seven times 2019 levels.

Sector Performance Across the Index

The FTSE NAREIT All REIT Index shows year-to-date returns up over 6%. Hotel and lodging, data centers, and senior housing lead the market with double-digit returns.

Multifamily apartment trusts remain in negative territory due to oversupply and weaker rents. However, demand for multifamily housing will grow alongside interest rates because fewer people can afford to buy a home.

Industrial assets, regional malls, and office properties are posting positive returns despite higher borrowing costs. Seth Laughlin stated that the broader economy remains healthy, describing the sector as the landlord to the broader economy.

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