We are just three years into a recovery of historic proportions, and any increase in interest rates gives meaningful evidence that commercial real estate is getting stronger. I am concerned about REITs with lower-quality tenants as it's apparent that a rise in debt costs could take a toll on certain rent-payers. For example, I would make certain that your investments are risk-aligned and you're being compensated for the added risk of poor tenant or thin demographic quality. For example, STAG Industrial ( STAG), Whitestone REIT ( WSR), and Gladstone Commercial ( GOOD) are REITs that own properties in secondary markets with a considerable number of weaker tenants. When interest rates begin to rise, these lower quality tenants will be under more pressure, and that could impact occupancies for these REITs.
Although you will not be able to find them in the bargain basement, the blue-chip REITs are likely to provide safe and reliable dividend income. I especially like the REITs that have demonstrated a long track record of paying and increasing dividends. By focusing on dividend safety, you'll be able to establish some worthy targets that could enable you to weather the rising interest rate clouds.
At the time of publication, Thomas owned shares of Realty Income (O). Follow @swan_investor This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.