Why I've Stopped Buying REITs

The key implication is not that REITs are uninvestable, but that the hurdle rate for new capital has risen faster than the sector's ability to reprice. When cash and short-duration credit deliver competitive income without equity downside, REIT multiples tend to compress before fundamentals break, because buyers demand a wider spread for leverage, duration, and refinancing risk. That creates a second-order effect: the strongest balance sheets should continue to attract capital, while highly levered or externally financed landlords will see more expensive capital and weaker acquisition economics.

The most vulnerable parts of the real estate stack are the names whose dividend story depends on near-term payout growth rather than current coverage. If rates stay higher for another 2-4 quarters, the market is likely to keep punishing office, storage, and lower-quality shopping REITs hardest because their refinancing needs and tenant churn make the yield less durable than it appears. By contrast, subsectors with embedded contractual escalators and long lease duration can still compound, but only if management can avoid issuing equity into a weak tape.

The important catalyst is not just rate cuts; it's the slope of the yield curve and the real-rate path. A modest decline in policy rates may not be enough if long-end yields stay sticky, because REIT valuation is driven more by the cost of equity and long-duration discount rates than by short-rate headlines. The setup could reverse quickly if inflation cools without a growth scare, allowing both lower financing costs and a reopening of REIT issuance windows.

Consensus may be underestimating how much of the sector's weak relative performance is already a funding-cost story, not a property-fundamentals story. That means the best opportunities may emerge before the macro turns fully constructive, when cap-rate math still looks bad but price-to-NAV and dividend spreads have already over-discounted the risk. In other words, the opportunity is likely tactical and selective rather than broad-based: buy fortress balance sheets when yields are wide, not the average REIT after the cycle has already turned.