REITs may still make sense despite rising interest rates

On Behalf of | Dec 15, 2016 | commercial real estate

When interest rates are rising and economic indicators are good, investors in Florida and around the country tend to concentrate on equities over other investments like real estate investment trusts. Most experts expect the move away from REITs to pick up even more momentum in the wake of the Federal Reserve’s announcement of a quarter point rate hike on Dec. 14, but some analysts say that investors should take a close look at the opportunities in certain areas of the commercial real estate market before pulling their money out.

Interest rates fell to historic lows following the 2008 financial crisis, and this made high-yield investments like REITs extremely popular. REITs are required to pass 90 percent or more of their returns to shareholders each year, but even yields like these may fail to lure investors away from equities when the economy is growing and interest rates are inching upwards. However, REITs are largely made up of commercial real estate, and this can be a lucrative market when the economy is healthy and the demand for space is high.

Much has been written in recent quarters about the problems plaguing the retail sector due to the exponential rise of online shopping, but the growth of e-commerce has companies like Amazon and Federal Express scrambling for additional warehouse space. Analysts have identified warehouses as an area of the commercial property market that will likely continue to post robust gains for several years, and demand is expected to be particularly high near densely populated urban centers.

Attorneys with experience in the commercial real estate market may encourage their clients to consider warehouse projects for a number of reasons. Warehouses are generally straightforward and inexpensive to erect, and legal obstacles like zoning and land use issues may be less likely to bring these projects to a halt. Warehouse tenants could also be less demanding than companies renting office spaces, manufacturing facilities or retail stores.

Source: New York Times, “Fed Raises Key Interest Rate, Citing Strengthening Economy”, Binyamin Appelbaum, Dec. 14, 2016