Federal Reserve Bank

WASHINGTON, DC—It appears that respondents to a GlobeSt.com poll on future REIT values have not been drinking the Kool-aid, err, I mean listening to conventional wisdom about the REIT industry and how they are not as interest rate sensitive as widely assumed.

When we asked why REITs were doing so well this year, despite the probability that the Federal Reserve Bank would raise rates, the majority, or 52% answered that their current excellent run is only temporary. Right now, this group agreed, rates are still relatively low and the Fed is only slowly raising them. “But once they reach a certain level, investors will dump their REIT stocks as expected.”

Another 27% declared that investors’ love affair with REITs right now is not about interest rates at all. “Investors are waiting for the next equity crash, and REITs are as good a place as any to ride out the next storm,” they agree.

Only 21% agree with the line of thinking that is popular in the REIT industry, which is that the economy’s fundamentals are strong and the employment rate is steadily improving—which, above all, is what matters for REITs.

There are valid arguments that each camp can make to back up their positions.

Last year REIT values took a nose-dive around the time the Federal Reserve rather inelegantly announced it would be ending its quantitative easing program. This year they have recovered nicely and are routinely outperforming the S&P 500 month after month. REIT advocates will tell you that the market has priced in the expectation of rising interest rates and still love these securities.

Math, though, is on the pessimists’ side. Rising interest rates simultaneously make REITs more expensive and other asset classes more attractive.

As the saying goes, only time will tell which position was the correct one. And that time may be approaching faster than realized when this survey was taken, approximately one month ago.

May’s employment numbers were unexpectedly solid and speculation is growing that the Fed will begin allowing interest rates to rise sooner than expected.