Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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COMMERCIAL INVESTMENT REAL ESTATE 14 September | October 2017 Rising Tide For REITs, rising interest rates may mean a bumpy ride ahead. by Stuart Eisenberg T he Federal Reserve has a clear message for the market: Buckle up, we're hitting the gas. The Fed's latest rate hike in June 2017 was its third since December 2016, with the goal being to raise the Federal funds rate to 3 percent by 2019. An additional increase is anticipated before the year ends. Currently at 1.25 percent, interest rates today may not be sky high, but they are a far cry from their seven-year stint at 0.25 percent — a rate of effectively zero. After the prolonged stasis period, the market must now adjust to the changing rate of Federal funds. Real Estate Investment Trusts are among those evaluating the impact of rate increases to their profit margins — with the largest players in the sector factoring in rising interest rates as a risk in the year ahead. According to the 2017 BDO Risk Factor Report for REITs, 98 percent of REITs cite interest rate increases and their ability to hedge against them as risks to their business. Published in June by BDO USA's Real Estate and Construction Practice, the report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. REITs. Over the course of the study's history, the percentage of REITs referencing interest rate increases as a concern has steadily risen, registering a 10-percent jump to 98 percent in 2017 compared to 2013 at 88 percent. REITs rely heavily on debt to finance their investments, and even a marginal increase in interest rates raises borrowing costs. Interest Rate Repercussions Beyond the direct impact to REITs, higher costs of debt and equity could strain tenants that have benefited from the low- interest rate environment and the availability of cheaper debt. In anticipation of these changing market dynamics, another risk for REITS also has seen a steady increase. The top 100 REITs unanimously cite access to capital, financing, and liquidity as a risk to their business, up from 96 percent in 2016 and 93 percent in 2014. While REITs may experience a negative impact to their opera- tions in the short term, the Fed's decision to implement gradual rate increases suggests renewed economic confidence, which hedgehog94/Getty Images FINANCING FO C U S