Rising Rates Pummel REITs Performance

This past quarter was the worst quarterly performance in a year for real estate investment trusts. REITs lagged behind the stock market in the third quarter due to the expectations that interest rates would rise over the next year.

Higher interest rates create alternative investments for investors to collect yields similar to real estate returns. Alternative investments have lower demand for REITs. Standard & Poor’s 500 Total Return Index increased by 1.13 percent, while FTSE NAREIT all REIT Index dropped by 2 percent in the third quarter. In the first eight months, real-estate stocks had high performance due to low interest rates and an improving economy. This past month REITs took a dramatic decline.

REITs acquire warehouses, shops, office buildings and other commercial real estate assets that are sensitive to rising rates. The trusts are required to pay at least 90 percent of their profits to shareholders and are not required to pay corporate tax on the profits they distribute. Not only do rising rates make alternative investments have equal or higher yield than REITs, but the increase cost of debt will make it more difficult for REITs to acquire and develop new properties. Rising rates signal a strengthening economy, which can benefit REITs in the future.

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Nick Banks

Nick created Front Street Commercial Real Estate Group in 2002 and spent the first eight years developing and acquiring office and retail projects in South Florida as well as North Central Florida. In 2010 the focus of the firm was shifted to primarily serve third party clients and perform brokerage, property management and mortgage banking functions. Nick has personally developed and acquired nearly 200,000 square feet of office and retail properties in markets throughout Florida. Prior to founding Front Street, Nick was the Director of Finance and Dispositions for Stiles Corporation in Fort Lauderdale where he financed and sold over $500 million in commercial real estate. Before joining Stiles, Nick was an Associate Director at GE Capital Real Estate where he sourced over $200 million in financing throughout Florida. Nick is a graduate of the University of Florida with a degree in Finance and a concentration in Real Estate. He serves as a board member and current vice-chair for the United Way of North Central Florida where he also chairs the Development Committee. Nick is actively involved with the Gainesville Area Chamber of Commerce where he serves as a board member and committee member for the Council for Economic Outreach. He is also a recent graduate of Leadership Gainesville which is a year long leadership program hosted by the Chamber. He is a member of Grace United Methodist Church where he has served as finance chair and as a member of the leadership council. Nick serves as an advisory board member of the University of Florida Bergstrom Center for Real Estate Studies. Nick was recently named chair of the Gainesville committee for the North Florida chapter of Urban Land Institute (ULI). He is a licensed real estate broker in the State of Florida and is a long time member of the International Council of Shopping Centers.

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