The Correlation Between Interest Rates and Real Estate Investment Trusts (REITs)

26 December 2025

If you're interested in real estate investing, you've probably come across Real Estate Investment Trusts (REITs). They're a fantastic way for investors to get into real estate without the hassle of managing properties themselves. But did you know that interest rates play a huge role in the performance of REITs?

Yes, that's right! When interest rates move, REITs often react. But how exactly does that work? And should investors be worried when rates rise? Let's dive deep into the relationship between interest rates and REITs to understand how they interact.

What Are Real Estate Investment Trusts (REITs)?

Before we start unraveling their connection with interest rates, let’s quickly go over what REITs are.

REITs are companies that own, operate, or finance income-producing real estate. They allow investors to put their money into large-scale real estate assets without actually purchasing properties themselves. Think of them as mutual funds for real estate—investors pool their money, and the REIT takes care of acquiring and managing properties.

There are different types of REITs, but the two primary categories are:

- Equity REITs – These REITs own and manage income-generating properties like apartments, shopping malls, and office buildings.
- Mortgage REITs (mREITs) – Unlike equity REITs, these invest in mortgages and mortgage-backed securities rather than physical properties.

Both types of REITs are influenced by interest rates, but they respond differently. Let’s find out why.

How Interest Rates Affect REIT Performance

Interest rates are one of the biggest external factors influencing REITs. But why? Well, REITs rely heavily on debt to finance their real estate purchases, and interest rates determine the cost of borrowing.

Let’s break it down and examine the different ways that interest rates impact REITs.

1. Borrowing Costs and Profitability

REITs often take on debt to acquire properties and expand their portfolios. If interest rates rise, borrowing becomes more expensive. This can reduce their profitability because higher debt payments cut into the income they generate.

Think of it like taking out a mortgage on a house. When interest rates are low, monthly payments are manageable. But when rates rise, those payments increase, making it harder to afford the home. The same concept applies to REITs—they have to pay more on their loans, affecting their overall returns.

2. Investor Demand and Yield Competition

REITs are known for their high dividend yields. Many income-focused investors prefer them because they generate steady payouts. However, REITs face competition from other income-producing assets, especially bonds.

When interest rates rise, the yield on bonds and other fixed-income investments also increases. This makes those alternatives more attractive to investors, potentially driving money away from REITs.

Why? Because investors can get similar returns from safer assets like government bonds, which don’t carry the same risks as REITs. As a result, REIT prices might decline as investors shift their money elsewhere.

3. Property Values and Cap Rates

Interest rates also influence real estate property values. Higher interest rates can push capitalization rates (cap rates) higher, which might reduce the overall value of properties held by REITs.

Cap rate is a key metric used to evaluate real estate investments. It’s calculated by dividing a property’s net operating income by its current market value. If cap rates go up due to rising interest rates, property values typically decrease. This can impact the valuation of REITs and, in turn, their stock prices.

Do Higher Interest Rates Always Hurt REITs?

Not necessarily. While higher borrowing costs and competition from bonds can be negative, REITs can still perform well in certain environments.

1. Economic Growth Can Offset Higher Rates

Interest rates usually rise when the economy is strong. A booming economy means higher consumer spending, increased demand for office spaces, and greater occupancy rates—all of which benefit REITs.

If REITs can increase rents and maintain strong occupancy, they may offset the negative impact of rising interest rates. So, while borrowing costs rise, the increased income from tenants can help soften the blow.

2. Not All REITs React the Same Way

Different types of REITs respond differently to interest rate changes:

- Equity REITs that own commercial properties might be more resilient if economic growth supports increased rental income.
- Mortgage REITs (mREITs), on the other hand, are directly tied to interest rate fluctuations. These REITs profit from the spread between the interest they pay on debt and the interest they earn on mortgages. Rising rates can shrink this spread, making it tougher for mREITs to turn a profit.

Investors need to consider which type of REIT they’re investing in before making decisions based on interest rate movements.

Should You Worry About Interest Rate Hikes?

If you’re a long-term investor, small interest rate hikes shouldn’t be a major concern. Here’s why:

- REITs often adjust by increasing rents over time, which can help sustain profits.
- Not all REITs are heavily leveraged—some have minimal debt and are less affected by rising borrowing costs.
- Diversification benefits – REITs give investors exposure to real estate, which can provide balance in a portfolio even during times of uncertainty.

That said, if interest rates rise too quickly or unexpectedly, REITs may face short-term volatility. But for investors with a strong stomach and a long-term view, REITs remain a solid addition to an investment portfolio.

How Investors Can Navigate Interest Rate Changes

If you're holding or considering investing in REITs, here’s how you can navigate the effect of interest rate fluctuations:

1. Focus on Quality REITs

Stick to REITs with strong fundamentals—those with high occupancy rates, solid financials, and properties in prime locations. Companies with strong cash flow will be better positioned to weather interest rate hikes.

2. Look for Low-Leverage REITs

REITs with less debt are less vulnerable to rising interest rates. Before investing, check their debt-to-equity ratio to ensure they aren’t overly reliant on borrowed money.

3. Consider Diversification

A well-balanced portfolio can help minimize risk. If you’re worried about rate hikes affecting REITs, consider diversifying into sectors that benefit when interest rates rise, such as financial stocks or commodities.

4. Don't Panic Over Short-Term Movements

Markets tend to overreact to interest rate changes. Instead of making knee-jerk decisions based on short-term fluctuations, focus on the long-term value of your REIT investments.

Conclusion

The correlation between interest rates and REITs is complex, but understanding it can help investors make better decisions. While rising interest rates can pose challenges—such as higher borrowing costs, investor outflows, and lower property values—REITs can still thrive in a strong economy.

Rather than fearing interest rate hikes, investors should focus on high-quality, low-debt REITs that can withstand changing market conditions. By keeping these factors in mind, you can make informed investment choices and navigate the ups and downs of real estate markets with confidence.

So, the next time you hear about an interest rate increase, take a deep breath and assess how it truly impacts your REIT investments. Chances are, it's not as bad as it seems!