REITs face pressure from rising interest rates and Fed policy

Real Estate Investment Trusts (REITs) are facing downward pressure due to rising interest rates and bond yields. Net-lease REITs, such as Realty Income and Agree Realty, have seen significant declines, with Realty Income falling approximately 14% and Agree Realty dropping 16% over a three-month period.

These companies operate by purchasing properties and leasing them back to tenants through long-term arrangements. Rising interest rates increase their cost of capital and make the fixed rent hikes in their long-term leases less attractive relative to the higher yields now offered by bonds.

In the broader market, the Federal Reserve has implemented its first rate hike since 2023, signaling a “higher-for-longer” interest rate environment. While Treasury yields have climbed, with the 10-year reaching 5%, the REIT sector has shown some relative resilience, declining by roughly 2% in recent sessions rather than experiencing the more severe sell-offs seen in previous years.