NAREIT’s Calvin Schnure Comments on REIT Market Reaction to Rate Hikes

March 21, 2018 | James Sprow | Blue Vault

NAREIT Economist Calvin Schnure describes how he expects traded REITs to respond when and if the FOMC raises the target for short-term interest rates by 25 bps at its meeting on March 20-21, to a range between 1.50 percent and 1.75 percent. He states that projections by FOMC members as well as markets in interest rate futures expect three and possibly four rate increases this year.

Schnure says, “The REIT market generally overreacts initially to news that affects the timing and possible aggressiveness of Fed tightening, as well as to increases in long-term interest rates, but tends to recover over time. It’s worth noting that the REIT market’s adverse reaction to interest rates is a relatively new phenomenon. Indeed, in the past, REIT share prices often rose when interest rates increased. The reason why is relatively straightforward, that interest rates increases were accompanied by stronger growth in the economy and in real estate markets. The higher earnings that this growth generated were more than enough to offset any drag from higher interest rates.”

“Interest rates are quite low by historical standards, and are likely to remain low even after the Fed carries out its rate increases; one might characterize the FOMC’s moves as taking the foot off the accelerator, but not stepping on the brake. There remains considerable uncertainty, however, about the period ahead, including Fed policy and interest rates as well as the strength of the overall economy. The economy, however, will most likely continue to grow and provide support for real estate and REITs, which will bolster their operating performance in the periods ahead.”

For the article, see:  https://www.reit.com/news/blog/market-commentary/fomc-and-reits