Strategic Liquidity and Shareholder Value in Subscale REITs

The U.S. financial landscape in 2025 is marked by a fiscal crisis of historic proportions. According to the Congressional Budget Office (CBO), the federal deficit is projected to reach $1.9 trillion—6.2% of GDP—this year, the third-highest deficit in American history [The Budget and Economic Outlook: 2025 to 2035], Congressional Budget Office^[1]. By 2035, federal debt held by the public will surpass 118% of GDP, driven by surging mandatory spending and interest costs that will consume 22% of federal revenue [Congressional Budget Office Updates Baseline: Deficit Totals to Third-Highest in American History], Congressional Budget Office^[2]. These trends create a high-interest-rate environment that directly impacts subscale real estate investment trusts (REITs) managing distressed assets.

For subscale REITs—those with smaller asset bases and limited liquidity—the challenge is acute. Distressed real estate assets, often in economically vulnerable markets, require active management to preserve value. Yet rising borrowing costs and constrained access to capital markets amplify the risks of illiquid holdings. The board governance frameworks and capital structure strategies of these entities must evolve to navigate this environment.

Board Governance: From Compliance to Proactive Risk Management

Traditional board governance in REITs has focused on regulatory compliance and dividend stability. However, in a climate of fiscal uncertainty, boards must adopt a more dynamic role. The CBO's projections highlight a critical need for boards to prioritize liquidity risk assessment and scenario planning. For subscale REITs, this means embedding stress-testing into governance protocols to evaluate how rising interest rates and asset devaluation might impact capital reserves.

A proactive board should also advocate for diversified capital structures. For instance, while high-yield debt may offer short-term flexibility, overreliance on such instruments increases vulnerability to rate hikes. Boards must instead balance debt with equity issuance or alternative financing mechanisms, such as partnerships with private equity or government-backed programs. Transparency in these decisions is paramount to maintaining investor confidence.

Capital Structure Optimization: Navigating the Debt-Interest Feedback Loop

The CBO's data reveals a self-reinforcing cycle: rising deficits drive higher interest rates, which in turn increase borrowing costs and further strain fiscal sustainability . For subscale REITs, this dynamic necessitates capital structure optimization that minimizes exposure to rate volatility. One approach is to extend debt maturities to lock in current rates, though this must be balanced against the risk of long-term asset mismatches.

Another strategy lies in leveraging equity more strategically. While subscale REITs often face higher equity costs due to perceived risk, issuing shares to refinance high-cost debt can stabilize leverage ratios. Boards must also explore hybrid instruments, such as convertible bonds or preferred shares, to diversify funding sources without diluting control.

Shareholder Value Preservation: Communication and Long-Term Vision

Preserving shareholder value in distressed environments requires more than financial engineering—it demands clear communication. Subscale REITs must articulate how their capital structure choices align with long-term value creation, even as short-term performance may lag. For example, a board might justify retaining earnings to recapitalize distressed assets rather than maintaining dividends, provided the rationale is transparent.

Moreover, boards should consider defensive strategies, such as asset sales or joint ventures, to unlock liquidity without compromising core holdings. In a high-interest-rate environment, speed and decisiveness become competitive advantages.

Conclusion: A Governance Imperative

The fiscal trajectory outlined by the CBO underscores a fundamental truth: subscale REITs managing distressed assets cannot rely on historical models. Boards must act as stewards of both liquidity and strategic vision, optimizing capital structures to withstand—and even exploit—economic headwinds. For investors, the lesson is clear: governance quality and capital discipline will increasingly determine the survival and success of these entities in an era of fiscal strain.