What role do interest rates play in REIT performance?

Interest rates play a crucial role in the performance of real estate investment trusts (REITs) primarily through their influence on property values and borrowing costs. When interest rates rise, it leads to increased borrowing costs for REITs, as the cost of financing new acquisitions or maintaining existing properties becomes more expensive. This can result in heightened operational expenses, reducing profit margins.

Additionally, rising interest rates can decrease property values. Higher interest rates usually lead to higher capitalization rates, which are used to value properties. As capitalization rates increase, property values tend to decrease because potential investors will expect higher returns to compensate for the increased cost of financing, making current leases less attractive compared to new investments.

Given this context, it becomes clear that rising interest rates can negatively impact both property values and the cost of borrowing, resulting in potential declines in REIT performance. This understanding highlights the interconnectedness of interest rates and the overall real estate market, emphasizing why the first choice accurately reflects the relationship between interest rates and REIT performance.