A sample has emerged previously yr or so during which publicly traded REIT whole 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.
Up to now in 2025, 10-year Treasury yields are off latest peaks. And REIT whole returns have been up year-to-date, even amid a few of the broader inventory market volatility. By the tip of February, REIT whole returns had been up about 5% for the yr.
However whereas this inverse relationship has held agency for a interval, it isn’t at all times the case. In truth, there are durations when REIT whole returns and Treasury yields transfer in the identical path. To attempt to higher perceive the dynamic between REITs and rates of interest, Nareit launched a sequence of analysis items previously months, analyzing completely different variables.
WealthManagement.com spoke with Edward F. Pierzak, Nareit’s senior vp of analysis, about REIT returns thus far in 2025 and the latest analysis items.
This interview has been edited for type, size and readability
WealthManagement.com: Begin with February’s efficiency and year-to-date efficiency. How are REITs faring amid a few of the latest volatility?
Ed Pierzak: The FTSE Nareit All Fairness REITs index had sturdy returns in February, up 4.2% and on the yr, 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 lots of that stemmed from the rise in December and into January of the 10-year Treasury, which rose about 65 foundation factors.
At the moment, the yield is again all the way down to the place it was at first of December 2024. As we noticed that drop, we’ve seen stronger REIT efficiency.
WM: Does something stand out on the optimistic and adverse facet amongst particular property sorts?
EP: One which stands out is information facilities. Efficiency in February and year-to-date are each adverse with whole returns down virtually 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 can influence demand for information heart area.
Analyst Inexperienced Road instantly had a webinar, and so they began with the belief that the tech is viable, scalable and going to ship on all the pieces it guarantees after which tried to determine, “What does this imply for demand for information facilities?” Their take was that in the event 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 develop into a big pizza.
So, even when all the pieces holds true, we’ll nonetheless see sturdy demand for information facilities. It should solely be altering on the margins. General, that’s excellent news for the sector.
On the optimistic facet, industrial REIT whole returns are up virtually 15% year-to-date. Industrial had an extended 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 suppose the likelihood of a recession is coming into play. We take a look at a few metrics. Bloomberg’s February ballot of economists put the possibilities of a recession this yr 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 positively durations of uncertainty.
WM: So, one of many dynamics we’ve talked about a number of instances now’s the inverse relationship between Treasury yields and REITs in latest instances. However you even have performed some analysis that this isn’t a everlasting dynamic. You additionally appeared 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 gotten discovered?
EP: After we’ve talked about this inverse relationship, we get lots of reactions from buyers. They’re fearful about excessive and better rates of interest and what meaning for actual property. That fear, in some methods, could be warranted, however 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.”
Now we have come out with a three–half sequence.
The primary one we mentioned final month appeared at efficiency general in durations 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 personal actual property in all of these rate of interest environments.
The subsequent piece we revealed 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 durations with rising rates of interest, 78% of the time, REITs have posted optimistic whole returns. In declining price environments, we get related 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 properly.
One key takeaway we bought is that in durations of low GDP development and declining rates of interest—quarters with actual GDP development of lower than 1% or adverse—that’s not a very good recipe for REIT efficiency.
The place we stand right now is that the economic system is in fairly good condition. Jobs numbers and inflation all look comparatively good. We’re not fearful about that kind 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 look at a optimistic relationship between the 10-year and REIT whole returns. When it’s reducing, at a low degree or inverted, we are likely to see a adverse correlation.
An inverted yield curve is usually seen as a sign of a coming recession. The NY Fed has performed a lot of work on this. They’ve their manner of calculating the curve and the possibility of a recession within the subsequent 12 months. Generally, as the percentages of a recession improve, these are typically the adverse correlation durations.
The message comes out the identical. If the outlook on the economic system tends to be optimistic, then we’ve got a optimistic relationship. If the outlook is pessimistic, we are likely to have a adverse relationship.
One factor to notice is that the yield curve is now not adverse and has improved over the previous a number of months. Though historical past is not any indicator of future outcomes, meaning we very properly might even see a reversal within the relationship between REITs and the 10-year yield.
