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US REITs underperforming broader market in current rising-rate environment

Since interest rates began their most recent rise in July 2016, U.S. real estate investment trusts have logged their worst total-return performance relative to the S&P 500 in a rising-rate environment in recent years.

The SNL U.S. REIT Equity Index has produced a negative 0.98% annualized total return since July 8, 2016, compared to the S&P 500's total return of 16.49% on an annualized basis, as of May 29, 2018.

REITs outperformed the S&P 500 in four of the six previous rising rate-periods that have occurred since 2000, according to an analysis by S&P Global Market Intelligence. While they underperformed the S&P 500 in the two most recent rising-rate periods, REITs posted positive total returns in all six periods.

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Performance among REITs in different property sectors has varied in the rising-rate periods. REITs that lease space on a shorter-term basis — which allows them to adjust leases more quickly depending on economic conditions — have outperformed those with longer-term leases during these periods. Hotel REITs, which have the most transient tenant population, have performed best among REITs during the current and previous rising-rate environments since 2000.

While performance of the S&P Dow Jones short-, medium- and long-term REIT indexes ranks similarly to previous performance — short term outperforming medium term, which outperformed long term — in the current rising-rate environment, only the short-term REIT index is in positive total-return territory. The S&P Dow Jones U.S. Select Short-Term REIT Index comprises hotel, multifamily, manufactured home and self-storage REITs; S&P Dow Jones U.S. Select Medium-Term REIT Index includes industrial, shopping center, outlet center, diversified and other retail REITs; and the S&P Dow Jones U.S. Select Long-Term REIT Index consists of healthcare, regional mall and office REITs.

One striking departure from the previous six periods is the performance of regional mall REITs. Regional malls ranked second among REIT sectors in terms of median annualized return in the six prior rising-rate environments since 2000. In the current period, however, the sector is second to last, just above their fellow retail-oriented landlords, shopping center REITs. The retail industry has faced numerous headwinds over the past several years. Since July 2016, 67 U.S. retailers covered by S&P Capital IQ have filed for bankruptcy, with 40 of those in 2017.

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REITs on average have outperformed the S&P 500 in the 30-day, six-month and one-year periods following rate-increase announcements from the U.S. Federal Open Market Committee. There have been 23 such announcements since 2003. Both REITs and the S&P 500 were largely flat on average a week after the announcements.

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