Macroeconomic uncertainty in the United States and consequent sloth in trading activity took a toll on the performance of the real estate investment trust (REIT) industry in the first eight months of 2017. In fact, the industry underperformed the broader market, as indicated by the FTSE/NAREIT All REITs Index’s total return of 7.4% over this timeframe versus the S&P 500’s 11.9% gain.

Despite this, a number of REIT categories showed strength and posted stellar returns. Among them are infrastructure REITs that have gained 34.1% through August this year, while data center REITs have posted a total return of 31.8%. Moreover, industrial REITs delivered returns of 19.3%, handily outpacing the broader market. However, retail REITs bore the brunt with the sector incurring a negative return of 11.4%.

Admittedly, interest rates and the movement of Treasury yields have dominated the returns of the REIT industry, at least in the near term. But, the latest trend of returns for the above-mentioned REIT classes suggest that the focus has now shifted to the fundamentals of the individual asset category to which these cater to, rather than interest-rate movements.

Specifically, demand-supply dynamics and the performance of tenants played a key role in shaping up REIT returns. In fact, growth in cloud computing, Internet of Things and big data is not only helping tech companies, but also driving demand for data center REITs.

Moreover, the industrial asset category hogged attention for experiencing high demand, with the economy and job market displaying signs of recovery, ecommerce gaining strength and the manufacturing environment remaining healthy. However, shrinking mall traffic and store closures amid aggressive growth in online sales kept retail REITs on tenterhooks.

Going forward, REITs dependence on debt for their business and consideration as bond substitutes for their high and consistent dividend-paying nature will still make their short-term returns susceptible to the rate hikes and movements of treasury yields to some extent.

Nevertheless, barring short-term hiccups, this special hybrid asset class has proven time and again that rate hikes do not necessarily impact long-term returns from REIT stocks. Rather, in most cases, the returns have rallied and outperformed broader market gains when the rate has eventually moved north.

Of course, asset valuation, including bond coupons and stock dividends experiences a decline as hike in interest rate impact present value of future cash flows. But for REITs, the rise in rates also ushers in scope for increasing future cash flows. This is how REITs emerge as winners even with rate hikes.

This is because any decision to increase rates would reflect growth in the domestic economy, rising inflation and the Fed’s confidence in the recovery. And when the economy expands, there is growth in jobs and consumer spending, which in turn drives demand for real estate, leads to higher occupancy levels and boosts landlords’ power to command higher rents, thereby supporting REIT earnings, cash flow and dividend. So, the fundamentals of the underlying asset category to which REITs cater to and the impetus the asset category will receive from a growing economy commands more attention.

Dividends Stand Tall

The U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders. This unique feature made the industry stand out and gain a solid footing over the past 15-20 years.

In fact, dividends are by far the biggest enticement to invest in REIT stocks, and income-seeking investors still continue to prefer them. This is because, as of Aug 31, 2017, the dividend yield of the FTSE NAREIT All REITs Index was 4.1%, which handily outpaced the 2% dividend yield offered by the S&P 500.

Among the REIT market components, the FTSE NAREIT All Equity REIT Index enjoyed a dividend yield of 3.8% while the FTSE NAREIT Mortgage REITs Index had a dividend yield of 9.6%. Over long periods, REITs have outperformed the broader indexes with respect to dividend yields.

Capital Access

In recent years, REITs have also managed their balance sheets well and focused on lowering debt and extending maturities. Also, REITs have indeed been proactive in the capital market, with the stock exchange-listed REITs collecting $69.6 billion in capital offerings in 2016.

Moreover, REITs raised $62.8 billion of capital in the first eight months of 2017, well ahead of the $52.3 billion generated in the comparable period prior year. This denotes investors’ growing confidence in the industry.