Analysts, Divided Over Effects of Rising Interest Rates, Say There's no 'REIT' Answer

Some analysts believe that a rise in interest rates will negatively affect the REIT industry, given that mortgage rates will increase, placing pressure on REITs to generate new profits. Others, though, believe quite the opposite. These analysts believe that the REIT industry can only gain from a rise in rates.

The reasoning is as follows. The rise in rates indicates that the overall economy is stronger, which bodes well for REITs. That is, when the economy is healthy, it is easier for REITS to fill empty units. The "top line" growth offsets increases in interest expense. In addition, some analysts believe, besides indicating that the economy is strengthening, a rise in interest rates already tends to be "baked into" the REIT market and will thus have little impact on its overall health.

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Other analysts suggest that, based on historical charting, rising and falling interest rates have no direct impact on, or correlation to, the health of the REIT industry. Still others feel rising interest rates will affect certain REITs differently.

REITS with properties financed with floating-rate debt that have trouble filling vacancies may struggle. For solid rent properties, though, demand will continue to outstrip supply, leading to strong performance.

Other analysts say that mortgage REITs (primarily residential properties) may suffer as interest rates rise, while equity REITs (where leases tend to be locked in) will not.

April 1, 2005

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