Real estate investment trusts (REITs) are considered a rate-sensitive asset class, and the group confirmed as much in 2022. When the Federal Reserve set out on one of its most intense tightening campaigns in recent memory, broad gauges of real estate stocks tumble, some by as much as 20% or more on an annual basis.
Fortunately for investors considering real estate equities and exchange traded funds such as the ALPS Active REIT ETF (REIT), the sector notched gains in 2023 and 2024. That’s encouraging, but there’s more to the story. For starters, REIT is an actively managed ETF, meaning it can be more responsive to changes in interest rates — a clear cut advantage over passive rivals.
Second, history confirms that rising interest rates don’t guarantee declining commercial real estate prices (CRE). In fact, historical trends indicate the opposite. This potentially signals that ETFs such as REIT endure unjust punishment when Treasury yields move higher.
Rate History on Side of CRE Prices
Investors often see higher interest rates as burdensome to residential real estate prices because, in that scenario, mortgage rates head higher. That can lead to prospective buyers staying out of the market and would-be sellers keeping supply off the market. Conversely, history shows that higher rates don’t always damage CRE activity and pricing.
“Historical data show that, on average, CRE has performed well in different interest rate regimes. Both public and private real estate posted positive average total returns across all three interest rate groups. REITs also bested private real estate performance in each cohort,” according to Nareit. “Moving from the low to high 10-year Treasury yield groupings, the spread between public and private real estate average calendar year total returns progressively increased. Average annual total return spreads for the low, mid, and high groups were 1.64%, 3.65%, and 5.50%, respectively.”
For most ordinary investors, there are other points to consider, including the CRE efficiencies offered by ETFs such as REIT. Put simply, while direct CRE investment can be lucrative, it’s cost-prohibitive and complicated for many market participants. With an ETF like REIT, investors need not worry about those factors.
“With pricing that reflects market conditions, REITs are particularly well positioned to face the current higher interest rate environment. Other factors that provide REITs with a competitive edge over typical CRE investors include their best-in-class operational expertise, disciplined balance sheets, and efficient and ready access to cost-advantaged capital from a variety of sources including equity, debt, and joint venture (JV) partnerships,” concluded Nareit.
For more news, information, and analysis, visit the ETF Building Blocks Channel.
