A sample has emerged prior to now 12 months or so during which publicly traded REIT complete returns have moved in an inverse path to the 10-year Treasury yield. When yields have been rising, REITs have gone down and vice versa.
Thus far in 2025, 10-year Treasury yields are off current peaks. And REIT complete returns have been up year-to-date, even amid a number of the broader inventory market volatility. Via the tip of February, REIT complete returns had been up about 5% for the 12 months.
However whereas this inverse relationship has held agency for a interval, it isn’t all the time the case. In reality, there are intervals when REIT complete returns and Treasury yields transfer in the identical path. To try to higher perceive the dynamic between REITs and rates of interest, Nareit launched a sequence of analysis items prior to now months, analyzing totally different variables.
WealthManagement.com spoke with Edward F. Pierzak, Nareit’s senior vp of analysis, about REIT returns to this point in 2025 and the current analysis items.
This interview has been edited for fashion, size and readability
WealthManagement.com: Begin with February’s efficiency and year-to-date efficiency. How are REITs faring amid a number of the current volatility?
Ed Pierzak: The FTSE Nareit All Fairness REITs index had sturdy returns in February, up 4.2% and on the 12 months, is now up 5.3%, in contrast with the S&P 500, which is up year-to-date 1.4% in the identical interval. So it’s sturdy efficiency relative to the broader market.
We’ve talked concerning the inverse relationship with the 10-year Treasury yield for a while. REITs had weaker efficiency on the finish of 2024, and a whole lot of that stemmed from the rise in December and into January of the 10-year Treasury, which rose about 65 foundation factors.
In the present day, the yield is again all the way down to the place it was initially of December 2024. As we noticed that drop, we’ve seen stronger REIT efficiency.
WM: Does something stand out on the optimistic and damaging aspect amongst particular property sorts?
EP: One which stands out is information facilities. Efficiency in February and year-to-date are each damaging with complete returns down nearly 7% year-to-date. That, not less than partially, stems from the announcement of the DeepSeek AI and, with that, considerations about whether or not it should impression demand for information middle area.
Analyst Inexperienced Road instantly had a webinar, they usually began with the idea that the tech is viable, scalable and going to ship on all the things it guarantees after which tried to determine, “What does this imply for demand for information facilities?” Their take was that when you thought earlier than that demand was the equal of wanting an extra-large pizza, if all of the DeepSeek claims come to fruition, the demand for information facilities as an alternative would turn out to be a big pizza.
So, even when all the things holds true, we’ll nonetheless see sturdy demand for information facilities. It can solely be altering on the margins. General, that’s excellent news for the sector.
On the optimistic aspect, industrial REIT complete returns are up nearly 15% year-to-date. Industrial had a protracted interval of prosperity, then an imbalance in provide and demand. Now, it’s recalibrated, and it’s seeing sturdy efficiency once more.
WM: There’s additionally the dynamic of whether or not declining yields are signaling elevated possibilities of a recession. Is {that a} concern proper now?
EP: At this level, we don’t assume the chance of a recession is coming into play. We have a look at a few metrics. Bloomberg’s February ballot of economists put the possibilities of a recession this 12 months at 25%. The New York Fed additionally does some estimates, and it’s roughly in the identical ballpark. It doesn’t appear to be there are considerations of a recession, however there are undoubtedly intervals of uncertainty.
WM: So, one of many dynamics we’ve talked about a couple of instances now’s the inverse relationship between Treasury yields and REITs in current instances. However you even have finished some analysis that this isn’t a everlasting dynamic. You additionally regarded on the relationship between REIT efficiency and rates of interest in another methods. Are you able to discuss why you’re doing this and what you’ve got discovered?
EP: Once we’ve talked about this inverse relationship, we get a whole lot of reactions from buyers. They’re frightened about excessive and better rates of interest and what which means for actual property. That fear, in some methods, could be warranted, nevertheless it’s a kneejerk response. They’re pondering, “If charges go up, cap charges go up, and so all else equal, actual property values go down.”
We’ve come out with a three–half sequence.
The primary one we mentioned final month regarded at efficiency total in intervals of low, mid and excessive rates of interest. The excellent news is that irrespective rate of interest ranges, actual property, on common, posted optimistic returns throughout the board. Extra vital for REITs, they outperformed non-public actual property in all of these rate of interest environments.
The following piece we printed checked out modifications in yields. We checked out quarterly information and calculated on a rolling four-quarter foundation the modifications in Treasury yields and in addition added within the context of whether or not the economic system was experiencing low, mid or excessive GDP development. We put an financial backdrop on it.
In intervals with rising rates of interest, 78% of the time, REITs have posted optimistic complete returns. In declining price environments, we get comparable outcomes: 78.1% of the time, REITs have optimistic returns. From that, we see that whether or not charges are rising or falling, REITs can do effectively.
One key takeaway we bought is that in intervals of low GDP development and declining rates of interest—quarters with actual GDP development of lower than 1% or damaging—that’s not a great recipe for REIT efficiency.
The place we stand at this time is that the economic system is in fairly good condition. Jobs numbers and inflation all look comparatively good. We’re not frightened about that sort of surroundings.
WM: What does the third piece of analysis discover?
EP: The very last thing we did was look at the connection between yields and REIT returns, figuring out when it’s inverse and when it’s optimistic.
We went again to 2000 and checked out 180-day rolling correlations between yield modifications and REIT returns. We discovered it’s about 50/50.
Then we added a little bit of context. We plotted the 10-year Treasury much less the three-year. When that unfold is getting bigger—steepening or at a excessive degree—we have a tendency to watch a optimistic relationship between the 10-year and REIT complete returns. When it’s reducing, at a low degree or inverted, we are likely to see a damaging correlation.
An inverted yield curve is usually seen as a sign of a coming recession. The NY Fed has finished numerous work on this. They’ve their approach of calculating the curve and the possibility of a recession within the subsequent 12 months. Typically, as the percentages of a recession enhance, these are typically the damaging correlation intervals.
The message comes out the identical. If the outlook on the economic system tends to be optimistic, then now we have a optimistic relationship. If the outlook is pessimistic, we are likely to have a damaging relationship.
One factor to notice is that the yield curve is not damaging and has improved over the previous a number of months. Though historical past is not any indicator of future outcomes, which means we very effectively may even see a reversal within the relationship between REITs and the 10-year yield.
