Few sectors are more impacted by rising interest rates than real estate, affecting everything from home affordability to commercial property valuations. Higher interest rates have been a substantial drag on the sector’s recent performance, and the potential of recession in the second half of 2023 looms as an additional risk facing REIT investors.

While investors cannot completely escape the correlation between higher interest rates and lower real estate valuations, there is an opportunity to navigate the rate cycle to mitigate these near-term risks by examining floating-rate exposure, the quality or health of the balance sheet, the strength of the investment manager and the REIT’s debt maturity schedule.

REIT Overview: Sector-By-Sector

• Multi-family—Given the shortage of multi-family housing (and affordable housing, in particular), the outlook for this sector is reasonably solid, though local labor market strength and population growth remain important considerations.
• Senior Living—With Baby Boomers now entering the age range (75-84) when senior living facilities use is highest, the demand for these accommodations is likely to remain strong for many years to come.

• Health care—The same demographic trend supporting senior living also makes health care-related real estate more reliable in the face of recession and over the long term.

• Industrial—We believe the industrial sector is especially vulnerable in the short term since it’s highly dependent on economic activity levels. The longer-term outlook is more positive as online shopping grows and reshoring of manufacturing increases demand.

• Retail—Heightened recession risk adds to existing woes arising from pandemic-related changes in consumers’ shopping habits. The prospect for these properties is shaky, and we expect many will eventually be converted into other uses.

• Hospitality—After two years of recovery and growth following economic reopening, a recession may derail these investments as travel declines and competition heats up; many areas are already overbuilt and poorly positioned to survive lower spending on travel.

• Office—The pandemic has left office vacancies at historically high levels, making this sector the most at-risk. The problem of high vacancies will grow as more and more leases expire. While there may be opportunities to convert office space to other uses, including to residential units, they will be limited and occur over the long term.

• Public Sector—While state and local governments are in good financial shape, there are longer-term worries, such as devalued downtown properties, lower property and sales tax revenues, distressed mass transit financial health, and burgeoning health care and pension costs.

For a deeper examination of today’s REIT market, we invite you to read our latest American Portfolios Research Report: REIT Overview.

Please reference disclosures at: https://blog.americanportfolios.com/disclosures/