On Wednesday, Fed chairwoman Janet Yellen announced a raise in interest rates.  The third hike since the Great Recession, the quarter-point raise is likely to be succeeded by two or even three further hikes in 2017. 

Initially, it appeared investors took the news well. US stock markets rose in the minutes after the decision. On the other hand, the impact on Real Estate Investment Trusts (REITs) appeared to be subdued. All of the major senior housing REITs—including the “big three,” HCP Inc. (NYSE: HCP), Welltower (NYSE: HCN) and Ventas Inc. (NYSE: VTR)—were only up slightly following the rate hike announcement.

However, in the last two days, things appear to have taken a clearer shape as investors continue to digest the implications of this rate hike. After enjoying a maiden rally, U.S. REITs appear to have put on some brakes and now, they seem to be pulling back.

Conventional wisdom holds that higher interest rates pull down the value of Real Estate Investment Trusts (REIT) and corresponding exchange traded funds as the refinancing market takes a hit, borrowing becomes more difficult and real estate acquisitions become harder to finance.

REITs are likely to provide the first signals for what kind of direction the U.S. real estate market is likely to take. This is because with REITs, especially the exchange traded companies, investors can express their sentiments instantly. After that, private realtors, and dealers in real estate investments will follow with key figures for these alternative markets expected on monthly basis.

Now, with more rate hikes expected, mortgage rates are likely to continue rising thereby making it harder to finance real estate acquisitions.

The average 30-year fixed rate mortgage stood at 4.21 percent last week, a big move up from 3.68 percent a year ago. Mortgage rates jumped more than half a percentage point following Trump’s election and have continued a slow climb since then. With higher rates, the Mortgage Bankers Association is predicting that refinancing activity may drop to less than half of all mortgage activity this year.

So, do higher interest rates necessarily spell doom for real estate investors?

Limited evidence supports the claims that a rise in interest rates triggers a slowdown in property acquisition and in turn, a dip in REIT value. In the second half of 2016, interest rate “jitters” shook up REITs as IBD’s property REIT group dropped nearly 16%.

Following Wednesday’s announcement, all of the major senior housing REITs  were up slightly. They have since lost some of those maiden gains.

Nonetheless, real estate investors and owners should account for conflicting data and claims by remembering that the long-term impact of interest rate hikes on asset classes can differ from the market’s knee-jerk response. T. Ritson Ferguson, CEO and co-CIO of CBRE Clarion Securities, is quick to point to long-term data that suggests that REITS can and have performed well in rising interest rate environments, often selling off and recovering quickly.

And according to Calvin Schnure, senior vice president of research and economic analysis at the National Association of Real Estate Investment Trusts (NAREIT), the current situation resembles that of the 2004-to-2006 period, when the Fed announced a series of rate hikes following a long period of low interest rates. After an initial weakening, REITs subsequently outperformed the S&P 500 in double-digit terms over the subsequent two to three years of rate hikes.

Whether or not REITs withstand higher interest rates depends in large part on the motivation behind the hikes. If they are the result of a strengthening economy and rising inflation expectations, property values can be insulated.

This was most certainly the case on Wednesday as the Federal Open Market Committee (FOMC) statement justified the rise with measured but assured optimism. “The simple message is: the economy is doing well,” Ms. Yellen told reporters, citing gains in income, business sentiment, consumer sentiment and wealth. She stressed that the rise be interpreted not a reassessment of the economic outlook but a sign that conditions evolved as anticipated as in gradual recovery from the Great Recession.

In its confidence, the Fed builds off of the general rosiness encapsulated by the first full employment report from the Labor Department under Trump, which recorded an increase in non-farm payrolls of 235,000 and a fall in the unemployment rate from 4.8% to 4.7%.

Conclusion

In short, the impact of Wednesday’s interest rate hike will undoubtedly place downward pressure on property acquisition. However, the overall, long-term effect on REITs will be mediated by a number of factors, including long-term growth prospects, a booming first-time low-end home buyer market, and ageing baby boomers who will continue to feed demand for senior housing.

Other recent positive developments for property acquisition will help cushion the impact, including the sweeping Day 1 Certainty program designed to enhance the mortgage origination process that Fannie Mae rolled out in October and that Freddie Mac is expected to emulate. If economic growth continues at this moderate pace as the Fed expects, the interest rate hike will not necessarily spell bad news for REITs.