WASHINGTON, DC—The Federal Reserve Bank will almost surely begin tightening interest rates this year, possibly as early as Spring. REITs have had an extraordinary run over the last cycle and they will continue to deliver strong returns. Those two statements are not mutually exclusive, as conventional--and perhaps outdated--economic wisdom would suggest.
That, at least, is the view of Kevin Mahn, CIO of Hennion and Walsh Asset Management, a Parsippany, NJ-based investment advisor.
"The catalyst behind the Fed's decision to raise rates is the gradually improving economy," he tells GlobeSt.com. "That means earnings are increasing, companies are hiring new employees and consumers are shopping." It also means, he says, that REITs will be flourishing as well.
Mahn also notes that REITs have done well during periods when the Fed has gradually raised interest rates—or rather, to be precise, when it has raised the Federal Funds Target Rate. Between 2004 and 2006, for example, the Fed raised the Federal Funds Target Rate on 17 different occasions in 25-basis point increments. During that same time period, US publicly traded REITs, as measured by the Wilshire REIT Index, experienced an average annual total return of 27.7%, he says.
"REITs and REIT investors should be okay, provided the interest rates rise gradually," he says.
All signs point to that happening, he continues. Mahn predicts that the Fed will embark a measured, drawn out tightening phase with a 25-bp hike in the spring of 2015. Then it will follow the same model it used during the 2004-to-2006 tightening period, gradually but steadily raising rates in 25-bp increments.
By the end of 2015, he believes, the Fed will have notched up the Federal Funds Target Rate between 75 to 100 bps. By the end of 2016, it will have reached a range of 2.5% to 2.75%.
Hennion and Walsh Asset Management has REIT holdings in a separate account portfolio and one of its investment strategies is dedicated to REITs. It is standing fast, Mahn says. "We are bullish on REITs for at least the end of this year."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
