Historically, REITs Perform Well Through A High Interest Rate Period

As interest rates rise, the general rule is that REITs will underperform. However, the data doesn’t back up that assumption. Iman Brivanlou, managing director of Income Equities at TCW, has looked at more than 20 years of historical data, and found that REITs actually show resiliency when interest rates rise.

It’s a fact of the market. As interest rates increase, cap rates increase and the valuation multiple gets compressed. “Everyone understands that, and yet when you go back and look at the historical performance of the asset class during periods of rising interest rate environments, you’ll see that REIT performance actually tends to keep up with the S&P if not outperform the S&P,” Brivanlou tells GlobeSt.com.

Brivanlou analyzed data from 2000, tracking REIT performance alongside S&P performance during periods of rising interest rates. “Every time there was a 1% or higher increase in the 10-Year Treasury, we monitored the performance of the S&P from the peak to the trough of the rising interest rate environment, and what you noticed is that the REIT index modestly outperformed,” he says.

REITs are able to perform because they are naturally diversified, or as Brivanlou says, they do not operate on a monolith. “There is a whole spectrum of interest rate sensitivity. On one end of the spectrum, there are assets correlated with lease duration and can re-price overnight, like hotels and lodging,” he says. “Next to that would be residential, which have lease terms of about a year. At the other end of the spectrum, there are long-term leases in the triple-net sector with pre-set escalators with five-year and 10-year options. There are a lot of equity-like characteristics that the space has.”

REITs with high quality assets in growth sectors have pricing power, even when interest rates rise. “That is the neglected part of the equation,” says Brivanlou. “The multiple does get compressed, but the earnings expand, and they expand more so than your typical S&P 500 company.

Plus, interest rates are not rising in a bubble. Rather, they are a response to inflation. “Usually, rates rise due to an inflationary concern, real estate is an inflation hedge,” adds Brivanlou. “For that reason, there is more resilience there than people think.”