Rising interest rates weigh down real estate funds
One look at the lackluster gains of real estate mutual funds this year might give the impression that commercial property owners are struggling through a relapse of their post-financial crisis woes.
But demand for office, retail and other commercial real estate has been steadily improving along with the economy, boosting occupancy and rental rates for many owners. And many economists project more of the same next year.
Even so, a surge in interest rates this summer and concern they could increase further next year have spooked investors, dampening the funds' returns. Real estate sector equity funds have delivered an average total return of 1.93 percent so far this year, trailing only precious metals equity funds, according to Morningstar.
The funds, which are often composed of real estate investment trusts holding commercial properties, are still up an average of nearly 6.1 percent from a year ago and have delivered an annualized return of 19.3 percent during the past five years.
Still, the slide in real estate funds represents a buying opportunity for investors who think that the market has factored in a further rise in interest rates.
“REITs are finally looking fairly valued,” said Abby Woodham, fund analyst at Morningstar. “They could, of course, go down further, but the valuation is much more attractive now than it has been for quite some time, so it's not all doom and gloom.”
What remains to be seen is how the market weighs the positive growth trends in commercial real estate against the risk of interest rates rising further.
Interest rates began rising in May on speculation that the Federal Reserve was preparing to pull back on its economic stimulus, which includes $85 billion in monthly bond purchases to keep interest rates low. The yield on the 10-year Treasury note rose from 1.63 percent at the start of May to nearly 3 percent by early September.
But the central bank surprised investors in mid-September when it said that it wanted to see more evidence of improvement in the economy, and it decided to maintain its bond purchases. The central bank meets again in December, but most economists don't expect any changes in the bond program until March. The yield on the 10-year Treasury ended trading at 2.75 percent on Friday.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Pittsburgh gas pump prices up nearly 9 cents
- Bill Gates repeats at top of Forbes’ list of billionaires
- Shift in what powers the grid raises concerns about fuel diversity
- Mylan closes $5.3B tax-lowering deal with Abbott Labs
- Free-market thinker Hall to lead Congressional Budget Office
- Severance tax on natural gas drilling backed by Pa. voters
- Colorado a handsome contender
- Wolf tax proposal puts Beaver County Shell plant at risk, gas group head says
- Protesters refuse to pay back education loans
- Highmark lays off nearly 100 workers, mostly in IT, as membership declines
- Economist Hubbard says GOP should grow number of workers