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US REITs – It’s not just about interest rates

By: Catherine Yoshimoto, senior index product manager

How does US Equity REIT performance stack up to the overall US equity market? Over the period from January 1991 through March 2018, the risk-adjusted performance (as measured by the Sharpe Ratio) of the FTSE Nareit Equity REITs Index—a leading benchmark for listed  US equity REIT stocks—was closely in line with that of the broad US equity market as represented by the Russell 3000® Index. Total performance for REITs was slightly higher. Over this period, moreover, the correlation between REITs and the Russell 3000 was 0.57, indicating the potential of diversification benefits relative to the general US equity market.

What about rising interest rate environments? As we’ve shifted to a normalizing US interest rate environment (based on the short term Federal Funds lending rate[1]), the concern that REITs might be vulnerable to poor performance due to rising rates is of particular interest and concern for market participants.[2] It is important to understand, however, that interest rates are not the only driver of REIT performance.

The chart below illustrates performance for key subsectors[3] of the FTSE Nareit Equity REITs Index since the onset of the current rising rate period, when the US Federal Reserve announced a rate hike in December 2015. As shown, the Industrial subsector exhibited the highest returns, boosted by the growth of e-commerce, as these industrial REITs own and manage many of the warehouses for e-commerce providers such as Amazon.[4] On the flip side, Regional Malls and Shopping Centers have suffered due to concerns that the related shift in consumer shopping preferences will ultimately hurt retail real estate operating performance. Manufactured Housing has enjoyed notable excess returns deriving from supply constraints as zoning laws and policies impede the development of new manufactured housing residential areas.[5]

As the performance of these subsectors during this period was driven largely by shifts in consumer behavior and housing regulations, it’s evident that interest rates are not the only driving factor of REIT returns.

However, it’s important to note rising rates—or expectations thereof—can still impact REIT returns. We can see this when we examine the aggregate performance of the FTSE Nareit Equity REITs Index in comparison to the Russell 3000 Index—a proxy for the broad US equity market—for the last four periods of rising Fed Fund rates.

As shown below, we see that in three out of the four periods, REITs underperformed the broad equity market, although in three of the four periods REIT returns were still in positive territory. Nonetheless, these performance differences suggest the expectation of rising interest rates have certainly contributed to the underperformance of US equity REITs relative to the broad market during these periods.

While interest rates are unquestionably an important factor in the performance of US equity REITs, other aspects of their performance and outcomes are important to consider. And even during periods of rising rates, US equity REITs may offer diversification benefits relative to the broad equity market (here represented by the Russell 3000 Index).

For a more detailed exploration of US listed real estate performance during past periods of rising Federal Fund rates, see: US Listed Real Estate sectors during periods of rising rates: what history tells us.



[1] There are a number of ways to measure periods of rising interest rates. For example, the interest rate can be defined as the 10-year Treasury rate rather than the Federal Funds rate, see the following for this alternative measure and analysis of the impact on US Listed Real Estate:

[2] Nareit cites two main ways that rising interest rates may affect real estate markets: 1) higher financing costs may slow the pace of real estate transactions, and 2) higher interest rates could pressure cap rates and cause property prices to decline:

[3] For additional information on the Nareit property sectors, refer to the FTSE Nareit US Real Estate Index Series ground rules:

[4] See for example: Industrial REITs Surge On Relentless E-Commerce Growth

[5] See for example:Manufactured Housing: Still The Best Kept Secret


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