"There was a time when people were overly exuberant about how long interest rates were going to stay low. That time is gone," says Cohen & Steers' Jason Yablon. Investors have pulled $728M out of real-estate mutual funds since May 15 (about the time interest rates started rising) vs. $42.8B in inflows into all equity funds, according to Lipper data. After outperforming the broader stock market for several years, REIT stocks have underperformed the S&P 500 for each of the last four months.
The best-performing REITs in Q3, say analysts, were those renting property with short-term leases. Those with longer-term leases - such as owners of health care facilities - suffer most as rates rise.
The only sectors showing gains in Q3 were self-storage (+7.45%) and hotel (+6.23%) REITs. "Self-storage was always regarded as the ugly stepchild of the real-estate industry, but our industry was always thought to be recession-resilient," says Extra Space Storage (EXR) CEO Spencer Kirk.