Market Research: Strong Fundamentals Drive REIT Returns Despite Rising Rates

Real estate investment trusts are outperforming expectations as property-level cash flows and accelerating earnings weaken the historic link between higher borrowing expenses and falling equity valuations, cnbc.com reported based on market research.

REIT Returns Climb as Sector Earnings Grow

• REIT returns year-to-date have climbed over 6% under the FTSE NAREIT All REIT Index, defying conventional pressure from rising 10-year Treasury yields.
• Earnings growth across the sector is tracking at roughly 8% to 9% annually, supported by cooling development pipelines that sit nearly 40% below 2022 peaks.
• Commercial real estate fundamentals diverge sharply by asset class, with hotels, data centers, and senior housing posting double-digit gains while multifamily apartments lag behind.

Why Treasury Yields Stopped Dictating Real Estate Performance

For years, Wall Street treated real estate investment trusts as a direct proxy for low interest rates. When benchmark borrowing costs fell, property valuations typically climbed, and dividend-heavy equities attracted income-focused portfolios. But that traditional correlation has broken down.

According to data highlighted in a report from Cohen & Steers, the direction and level of 10-year Treasury yields no longer serve as a reliable predictor of REIT returns. Correlations between REIT performance and yield shifts have dropped to their lowest point in roughly four years, as noted by David Auerbach, chief investment officer at Hoya Capital Real Estate.

Seth Laughlin, head of real estate strategy and research at Cohen & Steers, pointed out that debt costs have undeniably felt the pinch of a 100-basis-point move on the 10-year Treasury over the past year. Yet, fundamental business operations are overshadowing those macro headwinds.

“Certainly 100 basis points in the last year on the 10-year [Treasury] is an impingement to the cost of debt and does also mean every other asset class now has to compete with higher yields,” Seth Laughlin stated. “So you need to get a better yield from your alternatives, and real estate is definitely in that category. But at the same time, what we’ve seen is acceleration in earnings up to 9% this year. It’ll be something similar next year. Call it 8% earnings growth.”

How Balance Sheets Absorbed the Rate Shock

The aggressive monetary tightening cycle spanning 2022 through 2024 severely compressed asset values across commercial real estate as capital grew expensive. At the same time, an influx of new supply in several property subsectors slowed down rent expansion and cash flow generation.

That dynamic has reversed. Higher borrowing expenses effectively choked off new construction starts, creating a supply drought that now shields existing landlords from severe competition. David Auerbach noted in his report, titled “The Rate Shock That Didn’t Break REITs,” that development pipelines excluding data centers are sitting roughly 40% below their 2022 peaks and 2019 levels.

Data centers remain the primary structural exception, with pipelines holding steady at roughly seven times their 2019 footprint. Across the broader market, however, healthy balance sheets, strong dividend coverage, and improved earnings visibility are allowing trusts to absorb higher debt service costs without buckling.

REIT Sector	Year-to-Date Performance Trend	Underlying Market Driver
Hotel and Lodging	Double-digit returns	Resilient consumer travel and demand
Data Centers	Double-digit returns	Accelerating digital infrastructure and AI demand
Senior Housing	Double-digit returns	Favorable demographic tailwinds and occupancy gains
Multifamily Apartments	Negative territory	Oversupply and softer near-term rents

Where Divergent Sector Fundamentals Create Winners and Losers

Aggregate indexes mask a fragmented market where specific property types thrive while others struggle. The FTSE NAREIT All REIT Index shows total year-to-date returns up over 6%, but the distribution of those gains is uneven.

Hotel and lodging trusts, data center operators, and senior housing providers lead the market with double-digit returns. Conversely, multifamily apartment REITs remain anchored in negative territory as they work through lingering oversupply and softer rent growth in select markets.

Even so, structural demand for rental housing is projected to climb alongside interest rates because higher borrowing expenses price prospective buyers out of the single-family housing market. Industrial properties, regional malls, and even traditional office landlords are posting positive returns despite the restrictive rate environment.

As Seth Laughlin observed, the broader economy remains resilient, positioning real estate as a primary landlord to the macroeconomic engine. Out of 98 real estate investment trusts providing full-year guidance, 58 have raised their outlook, signaling confidence that operational cash flow will continue to outpace debt servicing pressures through upcoming quarters.

Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial advice.