Real Estate Investment Trusts (REITs) have become a cornerstone of modern investment portfolios, offering accessible exposure to real estate through publicly traded entities that must distribute at least 90% of taxable income as dividends. They come in three main types: equity REITs (directly owning and managing properties), mortgage REITs (financing through mortgages), and hybrid REITs combining both approaches.

REITs provide several key benefits: high dividend yields attractive to income-focused investors, greater liquidity compared to direct real estate investments, portfolio diversification since they often perform independently of traditional equities and bonds, and inflation hedging through their ability to increase rents during inflationary periods.

However, REITs demonstrate significant sensitivity to interest rates. On average, a 1% rise in rates leads to a 3-5% drop in total returns over six months, with mortgage REITs particularly vulnerable due to their reliance on debt financing. Nevertheless, strong economic growth can offset these negative effects, as evidenced during the Fed’s 2015-2018 tightening cycle when REITs still delivered positive returns of 13.7% despite a 2.25% rate increase.

Analysis of major REITs like Prologis, Equinix, and Digital Realty demonstrates that those in sectors with strong growth drivers (industrial properties, data centers) show better resilience to rate hikes than sectors like retail. Additionally, strategic approaches like sale-leasebacks, which reached a record $23.7 billion in 2023, help REITs increase liquidity and secure long-term income.