By Michael Schramm | Noyack Capital
November 07, 2022
On Wednesday, November 2nd, the Federal Reserve raised interest rates by three-quarters of a percent. This hike is the sixth time that the organization raised interest rates in 2022, and it marks the fourth consecutive time that rates have been raised by 0.75%.
Those invested in real estate might be concerned about how rising interest rates impact REIT investments. We’re not concerned about its impacts on our logistics REITs for the following three reasons.
1: REITs do better than you may think in high-rate environments
Investors are often concerned that higher interest rates can negatively impact real estate returns. Many property owners rely on financing to hire labor, purchase building materials and even purchase properties. When interest rates increase, financing costs can increase, which hurts profitability.
However, REITs have historically performed well in lieu of these costs. Data from the S&P Dow Jones shows that REITs have strong overall performance despite periods of high inflation. Further, in four of the last six high-interest rate environments, REITs earned a positive return. They even outperformed the S&P 500 in three of those periods. Given this information, there may be less of a connection between REITs and high interest rates than previously thought.
Further, our logistics REIT allows us to finance many properties at lower interest rates than today. Through our UPREIT structure, we can acquire properties and maintain their original financing, which includes the interest rates that were often determined years ago. These rates are often notably lower than what we’ve seen in recent days.
2: Our properties can raise revenue alongside interest rates
The Fed is quickly raising interest rates because of how quickly inflation is growing. In September, inflation increased at its fastest pace in the past 40 years. In response, the Federal Reserve is raising interest rates to tame rising prices by increasing the cost of borrowing.
Interest rates and inflation are closely connected in this environment, and that’s good news because our REIT is designed to hold up well against inflation. Real estate in general holds up well to inflation because property owners need significant time to build new property. As a result, these owners can charge higher prices on their rent in response to inflation given the lack of options.
Further, many of our REIT properties directly raise rents and prices with inflation. Our logistics and warehouses are under special long-term contracts that require annual rent raises in accordance with the CPI index, which is a common measure of inflation change over time. In addition, parking within our mobility hubs operate under dynamic pricing, which allows us to immediately raise costs in response to inflationary environments.
3: Rates don’t impact our long-term investment conviction
We believe in long-term investments within logistics real estate given how much supply is outpacing demand. In the past 5 years, digital commerce has grown 140% to a $2.4 trillion market opportunity, yet the supply of real estate infrastructure to meet that demand has increased only 25%. As consumers demand better digital commerce experiences, those who invest in properties that support these experiences have the potential to reap significant profits. This long-term outlook isn’t negatively impacted by high interest rates.
In fact, high interest rates can even be an advantage. High rates are causing building prices to fall, which allows us to purchase properties at more affordable prices and therefore provide investors with better long-term returns.
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