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  • Writer's pictureRealFacts Editorial Team

What Higher Interest Rates Mean for REIT Performance

Blocks that say REIT

Amidst the high interest rates of today’s economy, Chris Wimmer from Fitch Ratings highlights the challenges higher interest rates pose for Real Estate Investment Trusts (REITs), emphasizing the ripple effect on various sectors due to tenant difficulties.

Interest rate volatility has significantly dampened commercial real estate transactions across most sectors this year, creating wide bid-ask spreads that hinder price discovery. This issue is particularly severe in the office sector, which is grappling with the transition to remote and hybrid work models.

Despite the overall trend, data center REITs stand out as an exception. The surge in artificial intelligence is driving increased demand for data center space both in the U.S. and globally, maintaining robust growth in this sector.

Industrial REITs, which saw substantial growth before the pandemic due to e-commerce and last-mile delivery expansion, are now facing slower demand. In the first quarter of 2024, demand for industrial space fell short of expectations as retail sales, boosted during the pandemic, have since declined. Consumers are struggling with inflation and higher borrowing costs, leading to lower inventory levels for industrial landlords. Additionally, warehouse operators face cost pressures from labor shortages and wage inflation, delaying recovery expectations and reducing warehouse space valuations.

The retail sector is contending with decelerating U.S. sales growth and an uptick in bankruptcies from well-known names like Red Lobster, Rite Aid, and Bed Bath & Beyond. Less healthy tenants are burdened by high occupancy costs relative to sales. However, landlords remain optimistic about re-tenanting due to healthy occupancy rates and limited new supply, given today's high development costs. B-quality malls, though, face ongoing challenges with flat to slightly declining same-property net operating income (NOI) anticipated.

Health care REITs are navigating a challenging environment with rising expenses, staffing shortages, and struggling tenants. Hospital operators are finding it difficult to pay rent, leading to facility closures and bankruptcy risks. Senior housing operators are similarly burdened with increasing expenses. Life science and medical office fundamentals are also under pressure. However, there is a positive outlook for skilled nursing facilities, which are showing improved results and healthier tenants.

While data center REITs benefit from the AI boom, other sectors like industrial, retail, and health care REITs are experiencing significant headwinds due to higher interest rates and broader economic challenges.


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