How REITs Perform During Rising Interest Rate Environments

Invest in a REIT

That Outpaces Inflation

The Federal Reserve is projected to raise interest rates six more times in 2022, with more hikes set for 2023. With interest rates expected to reach 2.8% or more by mid-2023, investors who want yield should consider options other than the bond market. REITs are one option that can provide performance in a high-interest rate environment. 

Looking back into the 20th century according to Kiplinger and Nareit, in the past 50 years, REITs have outperformed the S&P 500 with over four times the yield, but this covers all interest rate trends, not just the times when interest rates are going up.

When interest rates rise, Real Estate Investment Trusts (REITs) have also tended to continue to deliver strong returns. We’ll be covering the history and expert analysis on REIT investment performance in recent years. 

Historical Analysis of REITs and Interest Rates

Take a look at REIT performance compared to 10-year treasury yields. According to Investopedia’s overview of REIT performance since the 1970s, an in-depth S&P study confirmed that REITS strongly outperformed Treasury yields with two exceptions during the late 1980s and mid-1990s. During the late 1990s moving into 2001, REITS performed similarly to the stock market, but still provided a 27.4% better return than 10-year Treasury bonds.

In two periods during this time, mortgage REITs outperformed Treasury yields and the stock market. Between 1976 and 1981, 10-year Treasury yields started out returning 6.9%, growing to 15.3% returns. The stock market returned 46% during the five-year period. How did REITs do during that time? A whopping 137.4% return.

Great REIT Returns During Late 70s/Early 1980s

According to the Chicago Tribune, using data from Freddie Mac, in 1976, a 30-year fixed-rate mortgage averaged 8.7% interest, rising to 11.2% in 1979. By 1981, mortgage interest rates went up to 16.63%: an all-time high. The wild, disruptive economy of the late 70s/early 80s is the environment in past decades where REITs showed some of their strongest performance and returns to investors.

Another High Point: 2003-2006

REITs outperformed Treasury yields and the stock market between 2003 and 2006 as well, according to S&P’s analysis. Treasuries offered 3.3% return in June 2003, and three years later, they were offering a 5.1% return. The stock market performed well during this period, with more than a 37% return. So, how did REITs do? They performed 108% better than 10-year Treasury notes and 70% better than the stock market.

Mortgage interest rates back when the top TV show was the original CSI were similar to those we’ve seen recently. In 2003, the average 30-year mortgage interest rate was 5.83%, and in 2006, it was 5.87%.

Other Higher-Interest Rate Cycles and REITs

REITs outperformed 10-year Treasury notes during four of the prior six interest rate growth cycles and outpaced the stock market during three of these periods. As you can see from our analysis, blanket statements like “When interest rates rise, REITs underperform” don’t represent the complete picture or even the majority of the picture.

Real estate management teams can achieve investment returns that outpace inflation through strategic selection of properties, excellent management, and well-structured lease and finance terms. Establishing long-term relationships with commercial developers contributes to long-term value for properties. Experience and the ability to interpret demographic and economic data also help to boost profitability that can outpace inflation.

Invest in a REIT that Outpaces Inflation

The studies we’ve covered encompass all REITs, including residential real estate, mortgage-backed securities, and commercial real estate. You can find REITs that invest in clean energy infrastructure and REITs that combine direct property ownership, mortgages, and real estate securities. 

We’ve been discussing the historical performance and comparisons of general REITs and the stock market and Treasury notes during times of rising interest rates.

NOYACK’s Logistics Income is a specialized fund that combines the expertise of NOYACK and its 38-year successful track record. It is designed to leverage the opportunities in a specific type of real estate: commercial logistics. The fund is intended to deliver stable passive income along with long-term appreciation. It is investing in a crucial sector of the economy: logistics that support the massive, still growing eCommerce industry. Whereas top-sector eCommerce investments are mature and may not continue to grow at previous rates, customers aren’t going to stop ordering products or requesting services online.

Since 2017, eCommerce has grown by 140% to reach $2.4 trillion. But the physical infrastructure that makes all of this eCommerce possible has only grown by 25%.

The NOYACK Logistics Income REIT is a $125 MM fund designed by investors for investors with a target IRR of 16 to 18%, and a target annual distribution of 6%. It is focused on warehouses, cold storage, healthcare, life sciences, and mobility hubs.

NOYACK’s NLI can outpace inflation because it is investing in logistics properties in essential sectors supporting the eCommerce industry. NLI benefits from NOYACK’s 38 years of successful experience investing in commercial real estate, with an average historical IRR of over 20%. NOYACK’s family office networks and developer relationships enable it to maximize value from investments. This experience has enabled NOYACK to create proprietary investment algorithms PropertyQuotient™ and MarketQuotient™, which score and rank assets. 

Contact NOYACK today to learn more about NLI, and invest in a commercial real estate portfolio built for wealth preservation and high-yield growth.