Edward F. Pierzak

Rising interest rates worry real estate investors. Their fears are rooted in the view that interest rate increases will result in rising cap rates and, all else being equal, declining property values.

REITs are real estate with attractive performance attributes. In research sponsored by Nareit, CEM Benchmarking took a comprehensive look at investment allocations and realized investment performance across 12 asset classes over a 25-year period (1998–2022) using a dataset covering more than 200 U.S public- and private-sector pensions with $4.1 trillion in combined assets under management (AUM).

Historical data show that, on average, real estate has enjoyed solid total returns across different interest rate regimes with REITs consistently outperforming their private market counterparts. 

A recent Nareit commentary examined occupancy rate momentum across the four traditional property types and found that property fundamentals have generally been soft or softening across these sectors.

With softening fundamentals, a lingering public-private valuation problem, and muted property transaction activity, the U.S. commercial real estate market appears to be stuck in a period of stagnation.

In today’s economy, the pace of inflation has moderated, economic growth has remained healthy, the unemployment rate has held steady, the prospects of recession have lessened, and expectations for continued monetary policy easing have proliferated.

The tenure of the recovery from the current divergence in public and private real estate valuations is now approaching two years.

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