The real estate investment trust (REIT) sector seems to be having a tough time due to the rising rate environment. In addition, new supply in certain asset categories and the rising trend of online purchases make the growth prospects bleak for the entire segment.

Consecutive hike in the interest rates over the past three quarters has taken a toll on the profitability of REITs. This is because REITs are typically dependent on debt for business, mainly borrowing at short-term lending rates and investing at long-term yield. However, the U.S. economy has been witnessing a steepening of short-term interest rate curve, while long-term yields remain low.  

Admittedly, concerns over another rate hike in December and movement of long-term treasury yields have made investors skeptical about investing in REIT stocks that are often considered as bond substitutes due to their high and consistent dividend-paying nature.

Moreover, the increasing number of retailers jumping on the dot-com bandwagon has created pressure on the top-line figure for retail REITs. Many retailers are filing for bankruptcy and opting for store closures, as mall traffic has been shrinking due to the soaring online purchases. Although these REITs are actively enhancing the omni-channel capabilities and heavily investing in redevelopment to lure customers, it may take a while for these efforts to offset the dent created in the operating results.

Elevated supply levels of new properties in several key markets have also plagued the fundamentals for many REITs operating in the residential, storage and healthcare segments. Oversupply, along with subpar demand, curtails the landlords’ pricing power and also dampens rent growth.

Moreover, it affects the absorption and occupancy levels of the properties. With a number of new projects scheduled to be delivered in the upcoming quarters, there seems to be no relief from the present scenario.

Performance of Different REIT Segments versus S&P 500

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