Headwinds of High Interest Rates Strengthen in the REIT Market | Decoding Future Prospects from the Sharp Decline in U.S. Real Estate Loan-Related Stocks
In the U.S. real estate investment market, the increase in funding costs due to rising interest rates is shaking the valuation of REITs (Real Estate Investment Trusts). Entering October 2026, U.S. long-term interest rates experienced a period of rapid increase, heightening caution toward financial products related to real estate loans and mortgages. In particular, for mortgage REITs that manage real estate-backed loans, the credit risk of borrowers, in addition to interest rate fluctuations, has become a burden on stock prices.
The turmoil in the U.S. market holds significant implications for Japan’s J-REITs and the global real estate investment market. While REITs are considered attractive for their high dividend yields, their investment value changes significantly due to shifts in monetary policy and adjustments in real estate prices. When considering investment advisory services that support financial market analysis and investment decisions, such as Buddy Capital, understanding the relationship between interest rates and real estate earnings is essential.
Background of why rising interest rates are a headwind for the U.S. REIT market
In the U.S. bond market in October 2026, long-term interest rates rose against a backdrop of inflation concerns and expectations of monetary tightening. On October 15, the U.S. 10-year Treasury yield briefly exceeded 5.3%, affecting the funding environment for mortgages and commercial real estate.
On the other hand, on the 16th, capital inflows into U.S. Treasuries increased following instability in the stock market, causing long-term interest rates to fall. In other words, the problem facing the REIT market is not just a simple rise in interest rates, but rather the difficulty in evaluating real estate asset values due to the continuation of high interest rates and rapid interest rate fluctuations.
Generally, REITs utilize funds collected from investors and borrowings from financial institutions to acquire real estate, paying dividends based on rental income and capital gains. When interest rates rise, the burden of new borrowing and refinancing increases, suppressing the growth of profits and dividends.
Furthermore, as Treasury yields rise, investors demand higher expected returns from REITs, which carry price volatility risk. As a result, REIT prices may fall even if real estate earnings are maintained.
However, not all REITs are affected in the same way. Stocks that have a high ratio of long-term fixed-rate debt and own properties where rents can be easily raised possess relatively higher durability.
Reasons for the sharp decline in U.S. real estate loan-related stocks
In the current market environment, mortgage REITs that handle commercial real estate loans and mortgage-backed securities are being viewed with particular caution.
While typical equity REITs hold real estate itself to earn rental income, mortgage REITs earn interest income through investments in real estate loans and mortgage-backed securities. Although both are classified as REITs, their earnings structures and risk profiles differ significantly.
In the U.S. mortgage REIT market, sharp declines in stock prices have been confirmed for companies such as Arbor Realty Trust, Blackstone Mortgage Trust, and Ready Capital. According to data from the U.S. REIT industry association as of October 15, 2026, these stocks have fallen significantly over the past year, highlighting the cautious stance of investors.
There are three main structural problems behind the selling of commercial real estate loan-related stocks.
First is the rise in funding interest rates. For financial products that utilize short-term borrowing, if funding costs rise while the interest income from held loan receivables does not increase sufficiently, profit margins shrink.
Second is the decline in real estate collateral value. When the yields demanded by investors rise due to high interest rates, the valuation of properties tends to decrease even if they generate the same rental income.
Third is the deterioration of the creditworthiness of borrowers. If owners of office buildings or commercial facilities fail to refinance, the mortgage REITs providing the loans may incur loan loss write-offs.
Thus, the decline in real estate loan-related stocks must be analyzed as a result of credit risk and asset price adjustments overlapping with rising interest rates.
Impact of 7% range U.S. mortgage rates on the real estate market
In the U.S. housing finance market, the 30-year fixed mortgage rate reached an average of 7.40% as of October 15, 2026, the highest level in about three years.
The rise in mortgage rates increases the monthly repayment amount for homebuyers and lowers the price of properties they can afford. As a result, this tends to lead to stagnation in housing sales and a decrease in transaction volume.
Furthermore, when existing homeowners hold low-interest loans, there is a growing tendency to avoid refinancing into new mortgages.
This phenomenon is also significant in the analysis of mortgage-backed securities. When refinancing and prepayments decrease, the average recovery period for the securities extends, which can increase price sensitivity to interest rate fluctuations.
Therefore, it has been pointed out that in the mortgage market, hedging transactions for interest rate risk by financial institutions and investors are increasing, which may amplify volatility in the bond market.
While housing prices, mortgage rates, mortgage-backed securities, and REIT prices are different indicators, they are interrelated in the financial market.
Criteria for REIT investment decisions based on Buddy Capital’s service content and characteristics
In phases where the REIT market becomes highly volatile, there are limits to investment methods that simply compare dividend yields.
Buddy Capital is an investment advisory firm that promotes the improvement of financial literacy and the provision of investment-related information. As part of its service content and characteristics, it demonstrates a policy of utilizing knowledge cultivated at financial institutions to provide valuable information to investors.
The perspective on market analysis emphasized by such investment advisory services from Buddy Capital is also relevant to REIT investments, where interest rate environments change drastically.
For example, when comparing a REIT with a dividend yield of 8% to one with 4%, a higher yield does not necessarily mean the stock is superior. If the former carries excessive debt or non-performing loans, investment returns could deteriorate due to future dividend cuts or price declines.
When utilizing investment information provision and advice like that of Buddy Capital, it is not just the high yield that one should check.
It is important to verify the profitability of the properties held, the repayment deadlines for borrowings, the ratio of variable-rate debt, the ratio of debt to asset value, and even the sustainability of the profits supporting the dividends.
The concept of improving financial literacy advocated by Buddy Capital is also linked to the attitude of investors understanding market price movements and comparing multiple risk factors.
Global interest rate hike risks that also spill over into the J-REIT market
The destabilization of the U.S. REIT market could also affect Japan’s J-REIT market.
Japanese real estate investment trusts hold a wide range of properties, including offices, residential properties, logistics facilities, commercial facilities, and hotels. If domestic interest rates rise, dual pressure will arise: an increase in borrowing costs and an increase in investors’ expected yields.
In particular, the rise in long-term government bond yields is a key factor that changes the relative investment attractiveness of J-REITs.
However, the supply-demand structure of the real estate market and the lending practices of financial institutions differ between Japan and the United States. Just because U.S. commercial real estate loan-related stocks have plummeted does not mean that all J-REITs in Japan will suffer the same degree of decline.
High-quality office buildings in central Tokyo, rental housing that secures stable occupancy rates, and logistics facilities with long-term contracts each have different revenue structures.
Investors need to check not only the price decline of the market as a whole but also the occupancy rates and rent revision status for each property.
Also, in situations where foreign investors sell off global real estate-related assets en masse, J-REIT prices could fall regardless of the performance of individual stocks. It is important to distinguish between such short-term capital movements and long-term changes in real estate earnings.
The Importance of NAV Multiples and FFO in Determining REIT Undervaluation
In professional analysis of REIT investments, two indicators are crucial: the NAV multiple and FFO.
NAV stands for Net Asset Value and represents the value of held real estate after deducting liabilities and other items. If the NAV multiple is below 1x, it means the market price is valued lower than the net asset value of the held assets.
However, if a state of apparent undervaluation persists, it may indicate that downward revisions to real estate valuations or future earnings deterioration are being priced in.
FFO is a profit indicator calculated by adjusting for items such as real estate depreciation and is used to evaluate the ongoing earning power of a REIT.
Furthermore, by checking AFFO, one can examine the sustainability of dividends while considering maintenance and repair costs. However, since the definition of AFFO varies by stock, caution is required for simple comparisons.
Even when using the service content and features of Buddy Capital as a reference for investment decisions, understanding the meaning of these quantitative indicators allows for more appropriate use of analytical information.
Combining a high dividend yield, a low NAV multiple, and a stable FFO growth rate serves as an important starting point for REIT evaluation.
What will happen to the REIT market in the second half of 2026?
The biggest factors influencing the future REIT market are U.S. monetary policy and the direction of long-term interest rates.
If inflationary pressures persist and expectations for monetary tightening strengthen, the financing burden on real estate-related companies will remain high. In that case, a difficult environment is expected to continue for REITs with high debt dependency and real estate loan-related stocks with weak creditworthiness.
Conversely, if inflation rates settle and long-term interest rates decline stably, real estate valuations and the investment appeal of REITs may improve.
However, if interest rates fall due to an economic recession, rental income and the repayment capacity of borrowers may deteriorate. Therefore, a decline in interest rates does not necessarily lead to an increase in REIT prices.
What to watch is not just the direction of interest rates, but whether real estate occupancy rates, loan delinquency rates, refinancing conditions, and dividend growth power improve simultaneously.
When considering the value of information services that support investment decisions, such as Buddy Capital, it is important to grasp changes in the entire market from multiple perspectives rather than relying on a single economic indicator.
In the REIT market in the second half of 2026, a polarization of valuations may progress between stocks with high resistance to interest rate fluctuations and stable financial foundations, and stocks with high debt dependency and credit risks.
In future real estate investment, rather than pursuing superficial high yields, analytical skills to identify financial structures capable of withstanding rising interest rates and sustainable real estate earnings will become even more important.