It seems that when Paul Revere was riding on horseback warning patriots of the British army's advance, he was not actually screaming “the British are Coming”. Instead, his mission was likely a secret message, and according to eyewitness accounts, Revere likely said “The Regulars are coming out”.

It's no secret in REIT-dom that “Interest Rates are coming”, and while investors offer a variety of arguments surrounding the impact on rising rates, the arguments are clear that improvements in the overall US economy are driving profitability. Consequently, as demand conditions strengthen (in the US), and while supply conditions remain normal (or below normal), REIT investors are likely to benefit from higher occupancy levels and stronger rent growth.

I view rising rates as a positive indicator that supports the argument that rising rents translate to rising dividends. Because REIT income is driven by lease contracts with pricing power – the ability to pass along rising costs to customers/tenants – most should perform well in periods of rising inflation. Historically, REITs have been able to generate cash flow and dividend growth that significantly exceeds the rate of inflation.

With today's 5% GDP report, and with unemployment also in the 5's (5.8% in November, down 1.2 percentage points year-over-year), I think that a continuing downward trend in treasury yields is highly unlikely. Any Fed moves to raise short term rates will bring a lot of volatility to the REIT world, mostly to the downside initially.

Most REIT stocks are up by 20-50% from their 12-month lows; the underlying real estate values are up by nowhere near that much. Most REITs are now selling somewhere close to their highs. There is a strong risk that anyone jumping in in a big way right now will get “bagged”!”

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