WPC - What If Rates Are Not Cut This Year? The Potential Impact To REITs
2024-03-07 16:15:01 ET
Summary
- The increase in the ten year treasury's yield has caused REIT share prices to decline over the past two years.
- High-quality REITs that proactively manage their portfolios have performed better than those who have not reacted to macroeconomic changes.
- The Federal Reserve's decision to cut interest rates depends on inflation, and if inflation remains elevated, it is unlikely that rates will be cut.
- We explore two REITs that are highly exposed to interest rate risk.
Recent History (Real Estate In the Post ZIRP era)
REITs have been beaten down by rising interest rates over the past two years. As the ten year reaches a normalized yield, share prices across the industry have been crushed as yields are forced to adjust to an elevating ten year treasury. Real estate ( VNQ ) has benefitted from extraordinary long term tailwinds, including a long term decline in the ten year treasury yield. Below is the yield of a ten-year treasury since January 1, 1984. The past four decades have exhibited a clear trend which has since reversed. Simply put, almost nobody currently working in the industry has likely encountered this situation before.
The falling yield floated property values as capitalization rates are generally attached to the ten year's yield. As a result, REITs performed well over that period regardless of the quality of management at the operational level. Top historical performers were in line with those of questionable quality… until recently. Take two net lease REITs, Realty Income ( O ) and Gladstone Commercial (GOOD) for example. Two vastly different businesses followed a similar long term trajectory for the better part of the past decade....
What If Rates Are Not Cut This Year? The Potential Impact To REITs