Resource Logo

Hello, you are using an old browser that's unsafe and no longer supported. Please consider updating your browser to a newer version, or downloading a modern browser.

Receive Updates
Resource Arrow Back to all
Date: July 20, 2017
Category: Real Estate

Q2 2017 Real Estate Report: Reaction to Shifts in Interest Rates

Real estate reaction interest ratesIn the second quarter, we saw some interesting developments in the year’s key theme, rising interest rates. Early on, markets appeared to be pricing in several rate hikes in 2017. Now, however, it appears that we may experience lower rates for a longer period than anticipated.

Rate outlook moderates

The economy is still performing well overall. Unemployment is at a 16-year low, gross domestic product growth is stable at around two percent a year—as it has been since the start of the recovery—and there are few signs of substantial downside risk. This positive outlook suggests that rates should be on track to rise as expected. However, inflation remains stubbornly below the Federal Reserve’s two percent target despite strong employment growth. In recent testimony before Congress, Fed Chair Janet Yellen reported that the central bank is paying close attention to the weakness in inflation. Her comments suggest the possibility the Fed may slow the pace of interest rate hikes until inflation shows signs of a definitive increase.

10 year Treasury interest rates


Real estate reacts

Traded real estate investment trusts (REITs) have reacted positively to this shift in the interest rate outlook. After a year-end correction in 2016, the FTSE NAREIT Index has trended upward in the first half of 2017.

Real estate total returns rising interest rates

In our view, last year’s correction was driven largely by a knee-jerk reaction to the shift in monetary policy. The FTSE NAREIT Index’s 2017 performance suggests that the market has now adjusted to the new policy environment and is trading on real estate fundamentals to a greater degree. Those fundamentals look sound: supply growth remains moderate in most markets, rent growth remains positive, and vacancy rates remain low. The overall outlook for real estate is thus largely positive.

A fresh look at retail

Taking a closer look within the broader real estate market, one subsector that has lagged considerably is the retail sector, in particular, regional mall REITs.

Many mall REITs are currently trading at 20 to 30 percent discounts to net asset value. While there are undeniably headwinds facing the sector, in some cases these REITs do look oversold.

As online shopping continues to grow, we have seen a wave of store closures and retail bankruptcies, especially among department stores. These closures have affected malls, which have historically relied on department stores as flagship anchors. Anchor store closures may result in lower foot traffic in malls, which can drive down store earnings. This may mean lower rent growth for mall REITs. However, even within this hard-hit sector, there are bright spots suggesting that retail is not necessarily dead. For example, Amazon’s recent acquisition of the high-end grocer Whole Foods indicates that even the e-commerce giant sees value in physical store infrastructure. And Warren Buffet’s recent purchase of a 9.8 percent stake in Store Capital Corp., a net lease REIT with tenants like Applebee’s and Ashley Furniture HomeStore, suggests that there may be overlooked value in the sector.

Many mall REITs are currently trading at 20 to 30 percent discounts to net asset value. While there are undeniably headwinds facing the sector, in some cases these REITs do look oversold. Thus, within the REIT sector, pockets of value exist that have the potential to drive returns for investors in the long term.


Looking ahead to the second half of the year, the positive outlook for real estate remains intact. Moderating interest rate growth and solid real estate fundamentals suggest that the sector may continue to perform positively for the rest of the year.

Resource is the marketing name for Resource Real Estate, LLC, Resource Alternative Advisor, LLC, and their affiliates. Resource may distribute certain products through Resource Securities LLC, a wholly owned broker/dealer, Member FINRA/SIPC


The information contained herein does not constitute an offer to sell or a solicitation to purchase securities. Such offers or solicitations can only be made by means of a prospectus. Prior to making any investment decision, you should read the applicable prospectus carefully and consider the risks, charges, expenses and other important information described therein. The value of your investments may decline, and you could lose some or all of your investment. To obtain a prospectus containing this and other information, please call (866) 773-4120 or download the file from Read the prospectus carefully before you invest.


Resource has an interval fund that is distributed by ALPS Distributors, Inc. (ALPS Distributors, Inc. 1290 Broadway, Suite 1100, Denver, CO 80203). Resource Alternative Advisor, LLC, Resource Real Estate, LLC, their affiliates, and ALPS Distributors, Inc. are not affiliated.


Performance data quoted represents past performance. Past performance is no guarantee of future results and investment returns and principal value of the Fund will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted above. For performance information current to the most recent month-end, please call toll-free (866) 773-4120 or visit


All statements and information other than statements of historical fact included on this website regarding strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. When used on this website, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. You should not place undue influence on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make on this website are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved because of the number of risks and uncertainties, many of which are beyond our control, including but not limited to uncertainties concerning the properties being operated and sold or refinanced, leverage and meeting debt service obligations, operating properties in different locations throughout the U.S., general, market or business conditions and changes in laws or regulations. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. To check the background of Resource Securities LLC or any registered individual, please go to FINRA’s BrokerCheck.