Video - September 2026REITs & Rates
Transcript
Christian Kansler:
Eric, can you explain what factors are driving REIT returns in the current environment?
Eric Rothman:
I guess a little bit surprising how well the REITs have done given the REIT environment, right? But what's important to remember is that the REITs already had a repricing couple years ago. That's point one. Point two, there is a convexity argument to be made here. Right? A 50 basis point increase on the 10 year treasury, call it from 5.25% today from 4.75% to 5.25% is not as impactful as it was when it went from a 100 basis points to 150 basis points.
REITs have an advantage relative to the private market because they use a lot less debt.
Typically, they're financing longer term than the private market. And just by virtue of the fact that they often run with less than half of what the private market does, that they actually get a meaningful advantage relative to the private market when interest rates rise. Then you've got the inflation piece of it, which is actually a positive for real estate because as interest rates rise and as inflation rises, materials cost rise, construction cost rise, and it costs more to put in new supply. We've seen new supply come crashing down. It's at very, very low levels.
So building that doesn't get permitted or drawn up today certainly doesn't come out of the ground in three years, which is the important thing for thinking about the runway. And then at the end of the day, fundamentals in the real estate space, thanks to the supply picture, but also good economy and healthy occupancy levels and decent rent growth is really what's driving the REIT market much more so than interest rates. It's really about earnings growth at the individual sector levels, durable growth, consistent growth. Things are kind of working in the real estate space.
And so I think that's the piece that maybe some folks are missing and explains why the REITs have done as well as they have.
Christian Kansler:
Eric, can you explain what factors are driving REIT returns in the current environment?
Eric Rothman:
I guess a little bit surprising how well the REITs have done given the REIT environment, right? But what's important to remember is that the REITs already had a repricing couple years ago. That's point one. Point two, there is a convexity argument to be made here. Right? A 50 basis point increase on the 10 year treasury, call it from 5.25% today from 4.75% to 5.25% is not as impactful as it was when it went from a 100 basis points to 150 basis points.
REITs have an advantage relative to the private market because they use a lot less debt.
Typically, they're financing longer term than the private market. And just by virtue of the fact that they often run with less than half of what the private market does, that they actually get a meaningful advantage relative to the private market when interest rates rise. Then you've got the inflation piece of it, which is actually a positive for real estate because as interest rates rise and as inflation rises, materials cost rise, construction cost rise, and it costs more to put in new supply. We've seen new supply come crashing down. It's at very, very low levels.
So building that doesn't get permitted or drawn up today certainly doesn't come out of the ground in three years, which is the important thing for thinking about the runway. And then at the end of the day, fundamentals in the real estate space, thanks to the supply picture, but also good economy and healthy occupancy levels and decent rent growth is really what's driving the REIT market much more so than interest rates. It's really about earnings growth at the individual sector levels, durable growth, consistent growth. Things are kind of working in the real estate space.
And so I think that's the piece that maybe some folks are missing and explains why the REITs have done as well as they have.
