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Mitigating economic and financial risks: Four key focus areas for REITs

REITs face risks from high interest rates, inflation, trade uncertainty, and legal challenges; proactive strategies can help mitigate these issues.

07/15/2025 · 8 minute read

Real estate investment trusts (REITs) have long been a popular investment vehicle, offering a range of benefits to investors, including dividend income, liquidity, diversification, and access to high-value real estate without the need for direct real estate ownership.

Historically, REITs have delivered competitive returns based on steady dividend income and long-term capital appreciation. Although the current economic landscape presents challenges that can impact their performance and valuation, 2024 proved successful even amid higher interest rates and inflation. 

REIT performance in 2024

Aggregate net operating income and dividends paid were both more than 3% higher in the first three quarters of 2024 compared to 2023. Additionally, according to the FTSE Nareit All Equity REITs Index, total returns were 14%, well above the 25-year average of nearly 10%, through the end of November 2024.

Looking ahead, recent deals demonstrate increased interest in transaction activity, with REITs well-positioned to continue to be competitive within the broader real estate market. However, the following four economic and financial risks are contributing to changes in the REIT landscape. By embracing proactive risk management strategies, your organization can better mitigate these risks, prepare for unforeseen challenges, and develop long-term resilience.

1. High interest rates

Fluctuations in interest rates are among the most significant factors affecting REITs in recent years. When interest rates rise, the cost of borrowing increases, which can lead to higher financing costs. In turn, this can reduce your profitability and negatively impact your valuations. Higher interest rates also make alternative investments, such as bonds, more attractive, potentially leading to a decrease in demand for REIT shares.

To mitigate the risks associated with rising interest rates, you may consider the following strategies:

  • Alternative sources of funding: By diversifying your funding sources, potentially with equity financing and alternative debt instruments, you can reduce your reliance on traditional bank loans, which may be more susceptible to market interest rate fluctuations.
  • Shortening of the borrowing time horizon: By opting for shorter loan terms, such as adjustable-rate mortgages, interest-only loans, or shorter repayment periods, borrowers may be able to better manage costs until rates possibly improve. That said, these alternatives come with their own risks that should also be carefully considered.
  • Opportunities for refinancing: By maintaining or improving your credit profile and remaining attentive to market changes to take advantage of lower rates should they occur, you may allow for lower mortgage payments and potentially free up equity for further investments.

2. Inflation

Historically, REITs have remained resilient during inflationary periods and market fluctuations, particularly if they are heavily invested in rental properties where rents may be adjusted. However, if inflation outpaces rental growth, REITs may struggle to maintain their income levels.

Similarly, inflationary periods can lead to higher borrowing costs and increased expenses for building materials, labor, and machinery, which can make new construction, renovations, or repairs more challenging.  

To protect against inflationary pressures, you may consider the following:

  • Rent adjustment provisions: It is important to establish clear provisions that allow you to adjust rents as needed while keeping tenants informed. This proactive approach can help you respond effectively to rising costs and maintain positive relationships with tenants.
  • Shorter lease terms: By opting for shorter lease terms, you can more frequently adjust rents to reflect current market conditions and inflation rates. This flexibility can help maintain revenue growth in an inflationary environment.
  • A focus on buy-and-hold properties: By concentrating on long-term rental properties, you can benefit from more predictable cash flow and steady appreciation over time. This strategy allows you to build a reliable income stream while also increasing the value of your investment.
  • Investment in value-added properties: Renovating underperforming properties allows you to increase value beyond inflation. As construction costs rise, renovated properties may become more desirable and profitable.
  • Diversification: As you seek to build a robust real estate portfolio, it's essential to look for markets that exhibit strong job growth, low housing supply, favorable tax environments, high rental demand, and strong economic fundamentals. By diversifying your investments across these promising markets, you can reduce risk and enhance your potential for returns.

3. Trade uncertainty

Tariffs and other trade-restricting measures globally can significantly impact operational costs for REITs. For example, increased tariffs on building materials or bottlenecks at ports and distribution centers can lead to higher construction costs, potentially delaying projects and reducing their profitability. 

Ongoing trade tensions can create market uncertainty, impacting investor confidence and their willingness to invest in or lease properties amid concerns about inflation, recession risks, and interest rate volatility.

To adapt to these challenges, you may consider:

  • Local sourcing: By sourcing materials locally, you can mitigate the impact of trade policies and supply chain disruptions that may strain your regular resource suppliers.
  • Supply chain diversification: Developing a diversified supply chain can help you minimize risks associated with specific suppliers or regions. This strategy can enhance resilience and support continuity in operations.
  • Close monitoring of geopolitical changes: Staying informed about changes in trade policies can help you anticipate potential impacts and adjust strategies accordingly. Engaging with industry associations or experienced specialists can also provide valuable insights into emerging trends.

With these challenges also comes opportunities; for example, shifts in trade policy may lead to increased demand for domestic manufacturing and logistics facilities, presenting growth opportunities for your organization.

4. An increasingly litigious environment

With social inflation on the rise, REITs may face higher insurance premiums and increased exposure to legal challenges.

Effective risk management and compliance are crucial for navigating this evolving landscape. Proactive measures can help mitigate potential legal challenges and protect against rising costs associated with more litigation, and might include:

  • Comprehensive risk assessments: Regularly conducting risk assessments can help you identify vulnerabilities and implement management strategies specific to each of your properties. 
  • Robust compliance and risk management programs: Establishing strong compliance and risk management programs can help you navigate regulatory requirements and reduce the risk of legal challenges. Training employees on compliance and how to reduce the risk of loss at properties can further strengthen this effort.
  • Consistent coverage review: Regularly reviewing insurance coverage can ensure that you are adequately protected against emerging risks. Engaging with experienced insurance professionals can help you identify gaps in coverage and explore tailored solutions.

Looking ahead: Balancing optimism with proactivity

The economic and financial risks facing REITs are multifaceted, but there are key opportunities ahead to protect your investments and continue a growth trajectory.

By adopting proactive strategies, reevaluating your existing coverage, and engaging with experienced insurance specialists, you can navigate these challenges more effectively. As the landscape continues to evolve, staying informed and adaptable will be necessary to thrive and develop lasting resilience.

To learn more about our REITs solution, click here.

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Duncan Ellis

US & Canada Industry Practice Leader, Real Estate & Hospitality

  • United States

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