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Five critical risks impacting real estate investment trusts

As the REIT landscape develops, understanding these risks is crucial for stakeholders to better navigate the complexities of the market effectively.

06/09/2025 · 6 minute read

From market fluctuations and regulatory challenges to climate vulnerabilities and cyber risks, companies that own, operate, or finance income-generating real estate — known as real estate investment trusts (REITs) — face unique challenges that can impact occupancy rates, rental income, and overall asset values, necessitating effective risk management strategies.

These corporations, trusts, or associations — modeled after mutual funds and bought and sold like stocks — must meet various requirements to qualify as REITs and may focus on a particular property type or have multiple types of properties in their portfolio, such as offices, retail spaces, and residential buildings.

The potential benefits are multifold: REITs can benefit from regular revenue streams, portfolio diversification, and long-term capital appreciation. However, to enhance their ability to fully capitalize on their investment opportunities, REITs must not only mitigate and manage the following risks but also cultivate organizations that are built for resilience.

A brief history of REITs

In September 1960, Congress passed the Real Estate Investment Trust Act to help expand access to income-producing real estate to investors — notably small investors. Previously, the benefits afforded to REITs were only available to financial intermediaries and wealthy individuals.

The new legislation sought to expand Americans’ access to investment in high-quality, commercial real estate, with the help of additional laws that came into effect later. Today, nearly 170 million Americans, or roughly 50% of all households, are invested in REIT stocks through their 401(k)s, individual retirement accounts, pension plans, or other investment funds. 

Understanding and addressing the most pressing risks

As the REIT landscape develops, evolving and emerging risks can significantly impact their performance and stability. Understanding the following risks is crucial for stakeholders to better navigate the complexities of the market effectively.

1. Economic and financial challenges

Property assets continue to be influenced by a number of factors, including:

  • Inflation of property values
  • Fluctuating interest rates
  • More frequent natural disasters increasing the likelihood of property damage
  • Shrinking capacity as insurers reduce their appetite in certain regions and for occupancies prone to loss

With higher interest rates come elevated borrowing costs, making it more expensive for REITs to finance acquisitions and developments. This situation is compounded by refinancing challenges as many REITs face the prospect of rolling over existing debt at significantly higher rates. The implications for cash flow and dividends can be severe and potentially lead to liquidity issues and reduced investor confidence. Additionally, property valuation uncertainty further complicates the picture, as volatility in appraisal values can affect net asset value and lead to potential write-downs.

Meanwhile, uncertainty persists amid changing trade policies including tariff and counter-tariff implementations, that could affect replacement cost values on items such as steel and timber. Shifting trade policies could also affect insurance premiums, potentially leading to higher costs for REITs.  

Stakeholders must remain vigilant, monitoring economic indicators and adjusting their strategies in response to these financial risks. One way to do so is by conducting proper valuations of their real estate assets that accurately reflect current market conditions and replacement costs. Effective valuations can help REITs make more informed decisions regarding acquisitions and capital improvements.

2. Shifting industry dynamics

The real estate industry at large is shifting, particularly in the office and retail sectors. The rise of hybrid work models has led to ongoing challenges in the office market, with above average vacancy rates and shifting tenant demands. REITs heavily invested in office properties may need to rethink their strategies, focusing on flexibility and adaptability to meet the evolving needs of today’s workforce.

In the retail sector, the impact of e-commerce and changing consumer habits continues to reshape traditional retail spaces. As consumers increasingly favor online shopping, REITs must adapt by reimagining their retail portfolios. This may involve diversifying into experiential retail or mixed-use developments that cater to changing consumer preferences. Understanding these industry dynamics is an essential component of a REIT’s overall strategy to to remain competitive and resilient in a rapidly evolving market.

3. Geopolitical and regulatory risks

Geopolitical instability presents a significant risk for REITs, particularly those reliant on foreign investment. Global tensions can affect capital flows and lead to uncertainty in the market. Additionally, policy and regulatory changes, such as shifts in tax policies and housing regulations, can have direct implications for REIT returns. Stakeholders must stay informed about geopolitical developments and engage with policymakers to navigate these challenges more effectively.

The regulatory landscape is also evolving. REITs that fail to adapt to these changes may face reputational risks and potential financial penalties. Proactive engagement with regulatory bodies and a commitment to transparency can help REITs mitigate these risks and enhance their long-term sustainability.

4. Climate-related vulnerabilities

Properties worldwide are facing heightened vulnerability to climate-related weather events. Increased insurance costs and the potential for property damage from extreme weather events can significantly impact financial performance. REITs must assess their portfolios for climate-related risks and consider investing in resilient infrastructure and sustainable practices.

Moreover, as investors become more environmentally conscious, REITs that prioritize sustainability may find themselves at a competitive advantage. Implementing green building practices and enhancing energy efficiency may not only mitigate risks but also attract a growing base of socially responsible investors.

5. Technology and cybersecurity threats

In an increasingly digital world, technology and cybersecurity risks are paramount for REITs. Reliance on digital platforms for tenant engagement and financial transactions can expose REITs to potential cyberattacks and data breaches. A successful cyberattack of a property management system, for example, can lead to significant financial losses, reputational damage, and regulatory scrutiny.

To mitigate these risks, REITs must invest in robust cybersecurity measures and ensure that their technology infrastructure is resilient. Regular training for employees on cybersecurity best practices and the implementation of risk management strategies are essential steps in a comprehensive plan designed to safeguard against potential threats.

Protecting REIT interests through proactive risk management

By proactively managing these risks and fostering a culture of innovation and resilience, REITs can better position themselves for sustainable growth in an ever-evolving landscape. Collaboration among industry stakeholders, along with a commitment to transparency and responsible practices, will be key to navigating the challenges ahead and seizing opportunities for success in the future.

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Duncan Ellis

US & Canada Industry Practice Leader, Real Estate & Hospitality

  • United States

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