In a statement that surprised few people, Federal Reserve officials said recently that the case for increasing interest rates has strengthened because of the economy's steady if unspectacular growth rate and low unemployment rate.
Any increase in borrowing costs that results from such a move could eat into the bottom line of the real estate investment trust sector that has largely performed well this year. The result: Many investors are ready to temper their expectations for this sector that has been outpacing the S&P 500.
However, they may want to reconsider such a pessimistic view.
A rate increase isn't likely to threaten the long-term performance of REITs. Rather, at worst, it could create a minor obstacle that can be easily navigated with the right investment strategy.
The economy's strength should be enough to offset any incremental rate increase that the industry experiences. Given the health of the economy, the outlook for REITs remains attractive.
"If interest rates are rising for the right reason, that there's growth in the underlying economy, you want to be in sectors that have shorter lease terms. You want to own hotels, self-storage, apartment sectors, [places] where the landlords can take advantage of the rate hike," said Drew Babin, senior research analyst for Robert W. Baird in Philadelphia.
"But if we have a rate hike and [the 10-year Treasury] goes back down to 1.5%, you'll want to own REITs with longer leases like health care sectors, where they have that stability," he said.
To be sure, a rate increase could affect REITs in the near term, particularly if it is a modest increase as expected. But REITs should be viewed as a long-term play.
One particularly interesting long-term play is Realty Income (O) .
Realty Income has said that it is "dedicated to providing shareholders with dependable monthly income."
Shares of Realty Income fell more than 2% in Wednesday trading.