10-Year Treasury Yield Posts 4-Year Rising Streak: Impact on REITs and Investment Strategies
Friday, Jan 3, 2025 1:07 pm ET

The 10-year Treasury yield has been on a 4-year rising streak, reaching 4.08% as of October 11, 2024. This increase in interest rates has had a significant impact on various sectors of the economy, including Real Estate Investment Trusts (REITs). As the yield on the 10-year Treasury note rises, borrowing costs for REITs increase, which can affect their acquisition and development strategies, dividend yields, and payout ratios. In this article, we will explore the implications of this 4-year rising streak on REITs and discuss investment strategies that investors can employ to navigate this environment.
Impact on REITs
1. Acquisition and Development Strategies: Rising interest rates increase borrowing costs for REITs, making it more expensive to finance new acquisitions and developments. This can lead REITs to reassess their expansion plans and focus on more profitable projects. Additionally, higher borrowing costs can put pressure on REITs' profitability, as they may struggle to pass on these increased costs to tenants through rent increases. This can be particularly challenging for REITs with fixed-rate debt, as they may not immediately benefit from rate cuts, as their debt is already locked in at higher rates (Source: Primior, September 27, 2024).
2. Dividend Yields and Payout Ratios: As interest rates rise, bond yields also increase, making fixed-income securities more appealing relative to REIT dividends. This can lead to a decrease in demand for REIT stocks, which in turn can lower their share prices and increase their dividend yields. However, the data provided does not include specific information on REIT dividend yields during this period. To analyze this, we would need historical data on REIT dividend yields. Additionally, the data provided does not include specific information on REIT payout ratios during this period. To analyze this, we would need historical data on REIT earnings and dividends.
3. Sector-Specific Fundamentals: During periods of rising interest rates, sector-specific fundamentals such as occupancy rates and rent growth can significantly influence REIT performance. For instance, residential REITs in high-demand areas like New York and San Francisco have historically managed to pass on higher borrowing costs to tenants through rent increases, which helps stabilize cash flows (Shekhar Tripathi, September 27, 2024). On the other hand, mortgage REITs (mREITs) are particularly sensitive to rising rates, as they borrow short-term funds at lower rates and invest in longer-term mortgages with higher yields. When interest rates rise, the cost of short-term borrowing increases faster than the returns on long-term mortgages, compressing profit margins (Shekhar Tripathi, September 27, 2024). Commercial REITs face a mixed impact from rising rates, as higher borrowing costs make it more expensive to finance new acquisitions and developments, but many commercial REITs are protected by long-term leases with tenants that include rent escalations tied to inflation (Shekhar Tripathi, September 27, 2024).
Investment Strategies for Navigating Rising Interest Rates
1. Interest Rate Hedging Strategies: REITs have employed various strategies to reduce their exposure to interest rate risk, such as equity issuance, leverage reduction, interest expense reduction, lengthening debt maturities, and maintaining high interest coverage ratios. These strategies have enabled REITs to better navigate the rising yield environment by reducing their sensitivity to interest rate changes and strengthening their financial position (Source: Nareit T-Tracker®, September 27, 2024).
2. Dividend Yields and Bond Yields: During periods of rising interest rates, bond yields become more attractive, which can lead to decreased demand for REITs. However, when interest rates fall, REIT dividends become relatively more attractive, potentially leading to increased investor demand for REITs. Historically, REITs have performed well during periods of rising long-term interest rates and have outperformed the S&P 500 in many of these periods (Source: Nareit, September 27, 2024).
3. Sector-Specific Fundamentals: Investors should focus on REIT sectors with strong occupancy rates and rent growth, as these fundamentals can help offset higher borrowing costs. For example, residential REITs in high-demand areas and industrial REITs that benefit from the continued growth of e-commerce may be better positioned to weather rising interest rates (Source: Shekhar Tripathi, September 27, 2024).
In conclusion, the 4-year rising streak in the 10-year Treasury yield has had a significant impact on REITs, affecting their acquisition and development strategies, dividend yields, and payout ratios. Investors should be aware of these implications and consider employing interest rate hedging strategies, focusing on REIT sectors with strong fundamentals, and monitoring changes in dividend yields and bond yields to navigate this environment effectively.