REITs in High interest rates and Higher inflation rates era

[sam]

I have heard both argument (pros or cons) or REITs investing in higher rate era. Not sure what to do as right now I don't have any investments in REITS.

Against:

During higher interest rate era REITs have to finance to higher rates so their yield will drop and so will their asset values. (I think this is very simplistic explanation).

For:

In general higher interests rates are in high inflation. Most REITS (public traded ones) have multiple properties so they have many leases expire every year and in higher rates era they will re-lease at higher rates. Most commercial leases I have seen have annual CPI increase adjustment (I have only read word CPI as I have never seen core CPI or PCE or core PCE in lease language as most people here will know it is a hot topic). Recently CPI is close to 9%. So even if REITs have to refinance their expiring mortgages to higher rates they still come out ahead as long as economy is ok.

During high inflation era REITs property values also goes up due to higher replacement cost.

IYR does NOT seems to working as it has lower absolute performance and poor relative performance compare to VTI.

For sake of discussion please ignore office REITs as it is another topic due to back to office pre-COVID norm. Companies also save rent money if they have lets say 80% of employees working from office at any given time.

Among the defensive XLU, XLP and XLV are doing fine but not IYR. It is quite disappointment to see XLRE losing -21% YTD (more than SPY and worst sector in S&P500 Index) for a defensive sector.

Any thoughts about investing in REITs in current environment?

[FD1000]

Generic comments: instead of spending time on slicing, dicing, high income and too many moving parts, spend your time on big picture analysis + performance + risk/volatility and use a limited number of funds. It will save you a lot of time, and you probably make more money.

2 examples:
1) 2010-2021: US LC, mostly growth, did better than most.  SPY/VOO is a good start.
2) In 2022: US LC VALUE + higher Div have been better. SCHD + HDV are is a good start.

BTW, SCHD is a good fund for both value + growth style and it pays about 3.3% annually.  Your holdings can be just 50/50 VOO/SCHD for years to come. 

If you want to be more diversified, look at US SC-MC + international. You can just use 30% for that. If you are a better trader, you can tweak, otherwise, KISS.