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September | October 2017 15
should benefit REITs in the long term. Strong economic fun-
damentals historically trigger a positive chain of events for REITs
— leading to increased rents and occupancy rates — which could
offset the steeper price tag for debt.
A positive impact for REITs is predicated upon whether the
forecasted economic recovery is realized, however, and all eyes
are on inflation, which is a key economic indicator. The U.S. core
inflation rate increased to 1.7 percent this May, but remains at its
lowest rate since mid-2015.
As CNBC reported ahead of the most recent rate hike, how
inflation evolves will be the X-factor for the market moving for-
ward. Risks related to inflation increased among REITs this year
as well, with 52 percent of REITs listing inflation as a concern,
up from 42 percent in 2016. The combination of low inflation
rates and rising interest rates is likely contributing to widespread
uncertainty for REITs.
Tightening capital markets could pose challenges for REITs
this year. A silver lining exists for them; the sector has a large
pool of capital stored away. In the first quarter of 2017, publicly
listed REITs raised more than $23.1 billion in equity and debt.
This was the most capital raised in any quarter since the second
quarter of 2014, according to NAREIT.
Once REITs adjust to the uptick in interest rates, competi-
tion for assets at lucrative prices is likely to eclipse interest rates
on REITs' risk radar. The Fed might be hitting the gas on rate
increases right now, but its goal is to cruise in neutral.
Stuart Eisenberg is an assurance partner and the national
leader of BDO's Real Estate and Construction Practice.
Contact him at seisenberg@bdo.com.
REITs rely heavily on
debt to finance their
investments, and even
a marginal increase in
interest rates raises
borrowing costs.
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