Why REITs aren't getting killed by rising interest rates this time around

• REIT earnings are accelerating with 9% growth this year and projected 8% growth next year, while 58 of 98 REITs providing guidance raised their outlook
• Development pipelines (excluding data centers) are roughly 40% below 2022 and 2019 levels, reducing oversupply concerns and supporting rent growth
• Hotel/lodging, data centers, and senior housing REITs lead with double-digit returns, while multifamily remains negative due to oversupply, though demand is expected to grow as higher rates price buyers out of homeownership

Summary: REITs Resilient Amid Rising Interest Rates

Real Estate Investment Trusts (REITs) are defying traditional expectations by performing well despite rising interest rates, with the FTSE NAREIT All REIT Index up over 6% year-to-date. Historically viewed as low-interest-rate plays due to their high-dividend nature, REITs are now benefiting from strong fundamental factors that are offsetting rate pressures.

Key Performance Drivers:

According to Cohen & Steers research, the correlation between REIT returns and 10-year Treasury yields has shifted over time, with rates alone not reliably predicting performance. While rising rates hurt commercial real estate from 2022-2024, current fundamentals show improvement with earnings growth accelerating to 9% this year and projected 8% growth next year.

Supply and Demand Dynamics:

Development pipelines (excluding data centers) are approximately 40% below 2022 peak and 2019 levels, according to Hoya Capital Real Estate. Reduced new supply is improving cash flow growth, with 58 of 98 REITs raising their full-year guidance. The 10-year Treasury has risen 100 basis points over the past year, yet REITs demonstrate their lowest correlation to interest rates in four years.

Sector Performance:

Top performers include hotel and lodging, data centers, and senior housing with double-digit returns. Industrial, regional malls, and office sectors also show positive returns. Multifamily apartment REITs remain in negative territory due to oversupply and weaker rents, though demand is expected to increase as higher rates limit homebuying affordability.

Market Outlook:

Analysts credit healthy property-level cash flows, strong dividend coverage, improved balance sheets, and attractive valuations relative to equities for the sector's resilience, positioning REITs as beneficiaries of broader economic strength.