How Do Interest Rates Impact the Real Estate Market?
Key Takeaways
- Real estate performance has historically strengthened during periods of falling interest rates.
- Lower rates reduce financing costs and improve real estate valuations, supporting returns.
- With rate cuts expected into mid 2026, real estate could benefit from a renewed tailwind.
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Interest rates play a central role in real estate returns. When borrowing costs fall, real estate investment trusts (REITs) often see improved performance as financing becomes cheaper and income-producing assets become more attractive relative to fixed income.
This visualization, created in partnership with Inigo, provides visual context to the relationship between REIT performance and interest rates.
The Historical Trend
Since 2016, periods of easing or stable rates have generally coincided with rising REIT values. When rates declined sharply in 2020, REIT performance rebounded quickly following the initial shock, and gains accelerated again during the low-rate environment of 2021.
| Year | Average Federal Funds Effective Rate (%) | All REITs (index) |
|---|---|---|
| 2016-01-01 | 0.34 | 100.00 |
| 2017-01-01 | 0.65 | 112.78 |
| 2018-01-01 | 1.41 | 118.75 |
| 2019-01-01 | 2.40 | 131.01 |
| 2020-01-01 | 1.55 | 152.97 |
| 2021-01-01 | 0.09 | 143.22 |
| 2022-01-01 | 0.08 | 186.45 |
| 2023-01-01 | 4.33 | 167.30 |
| 2024-01-01 | 5.33 | 161.03 |
| 2025-01-01 | 4.33 | 179.40 |
| 2025-07-01 | 4.33 | 178.81 |
Even as the economy navigated the COVID-19 pandemic, REIT performance rose by 21 percent between the first quarter of 2020 and the second quarter of 2022, when the Fed began raising rates after pandemic-era cuts.
Why the Next Rate Cuts Matter
After a rapid tightening cycle between 2022 and 2023, elevated rates weighed on real estate valuations. However, recent data shows REIT performance improving as expectations shift toward easing monetary policy.
With the Federal Reserve expected to continue cutting rates into mid 2026, reaching a median outlook of 3.25 to 3.50 percent by year end, borrowing conditions could become more supportive. For investors, this environment has historically provided a meaningful boost to real estate returns, reinforcing the close relationship between interest rates and REIT performance.
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- Source: https://www.visualcapitalist.com/sp/ig01-how-do-interest-rates-impact-the-real-estate-market/
