Assessing Dividend Sustainability in Real Estate ETFs Amid Rising Interest Rates

The real estate sector, long a cornerstone of income-focused portfolios, faces a pivotal test in the current rising interest rate environment. As the Federal Reserve's 2024 rate cut began to ease borrowing costs, the sector's resilience—and vulnerabilities—have come into sharper focus. For investors seeking stable dividends, the key lies in dissecting the debt structures and operational dynamics of income-generating real estate ETFs.

Sectoral Resilience: Residential and Industrial Outperform

The divergence in performance across real estate subsectors has been stark. Residential REITs, bolstered by persistently high home prices and mortgage rates, have seen sustained demand for rental housing. Industrial real estate, meanwhile, has benefited from the e-commerce boom, with logistics and warehousing spaces commanding premium rents. According to a report by Sortis, these sectors have outperformed office REITs, which continue to grapple with remote work trends and urban vacancy rates How Interest Rates Impact REITs: A Detailed Guide for Investors^[4].

For example, the iShares Core U.S. REIT ETF (USRT) and Vanguard Real Estate ETF (VNQ) have both shown recovery in 2023 and 2024, with USRT posting a 13.64% total return in 2023 and VNQ gaining 11.85% VNQ vs. USRT — ETF Comparison Tool | PortfoliosLab^[1]. However, their exposure to office REITs—particularly in urban cores—remains a drag. In contrast, the Nuveen Short-Term REIT ETF (NURE), which focuses on short-term leases in residential and self-storage sectors, has demonstrated better insulation from rate volatility 9 Best Real Estate ETFs of 2025 – Forbes Advisor^[2].

Debt Structures and Dividend Coverage: A Double-Edged Sword

The sustainability of dividends hinges critically on debt composition. REITs with a higher proportion of long-term, fixed-rate debt are better positioned to weather rate hikes, as noted by Sortis How Interest Rates Impact REITs: A Detailed Guide for Investors^[4]. Yet, many real estate ETFs remain exposed to variable-rate obligations. For instance, VNQ's 127.16% dividend payout ratio—a metric indicating that dividends exceed earnings—raises concerns about long-term sustainability VNQ Dividend History - VNQ Dividend Dates & Yield^[5]. In contrast, USRT's lower yield (2.85% as of September 2025) and more conservative payout strategy suggest a stronger buffer against earnings compression USRT vs. VNQ: Head-To-Head ETF Comparison - ETF Database^[3].

Mortgage REITs (mREITs), such as those held by the REM ETF, exemplify the risks of short-term debt. With a 9.5% yield, REM appears attractive, but its profitability is squeezed when short-term borrowing costs rise faster than returns on long-term mortgages How Interest Rates Impact REITs: A Detailed Guide for Investors^[4]. This dynamic underscores the importance of scrutinizing underlying holdings: ETFs like NURE, which emphasize short-term, high-demand assets, may offer a safer harbor.

The Fed's Pivot: A Balm for Borrowing Costs

The Federal Reserve's September 2024 rate cut has provided a temporary reprieve. As borrowing costs decline, REITs with high leverage—such as those in the industrial and residential sectors—can refinance debt at lower rates, improving cash flow. REIT.com notes that the sector's average debt ratio of 32.5% and a 4.1x dividend coverage ratio (earnings relative to dividends) suggest a broadly healthy balance sheet REIT Industry Financial Snapshot | Monthly REIT Data^[6]. However, this average masks disparities: office REITs, with higher leverage and weaker occupancy rates, remain fragile.

Strategic Recommendations for Investors

For income-focused investors, the path forward requires a nuanced approach:
1. Prioritize Quality Over Yield: ETFs like USRT, with a diversified portfolio and conservative payout ratios, offer more sustainable dividends than high-yield mREITs like REM.
2. Leverage Sector Rotation: Overweight industrial and residential REITs while underweighting office-focused funds. NURE's short-term lease structure aligns well with this strategy.
3. Monitor Debt Composition: Favor ETFs with a tilt toward long-term, fixed-rate debt. The JPMorgan BetaBuilders MSCI U.S. REIT ETF (BBRE), which weights larger, more stable REITs, is a compelling option VNQ Dividend History - VNQ Dividend Dates & Yield^[5].

Conclusion

The real estate ETF landscape is far from monolithic. While rising rates pose challenges, they also create opportunities for disciplined investors to capitalize on undervalued assets in resilient sectors. As the Fed's policy trajectory remains uncertain, the ability to differentiate between well-structured ETFs and those teetering on overleveraged edges will define long-term success.