Commercial Investment Real Estate September/October 2017 | Page 16
FINANCING
FOCUS
Rising Tide
For REITs, rising interest rates may mean a bumpy ride ahead.
by Stuart Eisenberg
T
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September | October 2017
Over the course of the study’s history, the percentage of REITs
referencing interest rate increases as a concern has steadily risen,
registering a 10-percent jump to 98 percent in 2017 compared to
2013 at 88 percent. REITs rely heavily on debt to finance their
investments, and even a marginal increase in interest rates raises
borrowing costs.
Interest Rate Repercussions
Beyond the direct impact to REITs, higher costs of debt and
equity could strain tenants that have benefited from the low-
interest rate environment and the availability of cheaper debt.
In anticipation of these changing market dynamics, another risk
for REITS also has seen a steady increase. The top 100 REITs
unanimously cite access to capital, financing, and liquidity as a
risk to their business, up from 96 percent in 2016 and 93 percent
in 2014.
While REITs may experience a negative impact to their opera-
tions in the short term, the Fed’s decision to implement gradual
rate increases suggests renewed economic confidence, which
COMMERCIAL INVESTMENT REAL ESTATE
he Federal Reserve has a clear message for the market:
Buckle up, we’re hitting the gas. The Fed’s latest rate
hike in June 2017 was its third since December 2016,
with the goal being to raise the Federal funds rate to
3 percent by 2019. An additional increase is anticipated before
the year ends. Currently at 1.25 percent, interest rates today may
not be sky high, but they are a far cry from their seven-year stint
at 0.25 percent — a rate of effectively zero.
After the prolonged stasis period, the market must now adjust
to the changing rate of Federal funds. Real Estate Investment
Trusts are among those evaluating the impact of rate increases
to their profit margins — with the largest players in the sector
factoring in rising interest rates as a risk in the year ahead.
According to the 2017 BDO Risk Factor Report for REITs,
98 percent of REITs cite interest rate increases and their ability
to hedge against them as risks to their business. Published in
June by BDO USA’s Real Estate and Construction Practice, the
report examines the risk factors in the most recent 10-K filings
of the largest 100 publicly traded U.S. REITs.