Heard on the Beach: Will the Cure Be Worse Than the Disease?
Rising real rates do damage to values, while higher inflation is benign. That this year’s rate spike has been primarily a function of higher real rates explains the weak start to the year. Seldom has the range of economic possibilities been as varied as it is today. Recession odds are up even as interest rates have jumped in reaction to the release of the inflation genie. The spike in yields has clobbered REIT share prices this year, and property prices have begun to drift lower. Today’s investment professionals lack experience to help assess the impact that stubborn inflation might have on real estate, but lessons from past interest rate/inflation scares offer insight. When Rates Have Risen: There have been 54 six-month periods over the last twenty-five years in which yields on corporate bonds jumped by at least 40 basis points. When that has happened, cap rates in the private market have gone down about as often as they've gone up, and REITs have delivered positive, but sub-par, returns. Over the last 16 years, REITs with short-lived leases (e.g., hotels) have REITs with longer leases (e.g., health care) during those periods. Variances around these averages are large.