U.S. real estate investment trusts have been slightly outperforming the S&P 500 in terms of total return performance during the ongoing period of rising interest rates that started in late 2020.

The Dow Jones Equity All REIT Index has posted an annualized total return of 11.7% since Aug. 4, 2020, comparatively better than the S&P 500's total return of 10.0% on an annualized basis as of July 1 this year.

Prior to this, REITs already had outpaced the S&P 500 in four out of seven previous rising rate-periods that had occurred since 2000, according to an analysis by S&P Global Market Intelligence. Even during times when they underperformed against the S&P 500, U.S. REITs still managed to record positive total returns in each rising-rate periods.

Office REITs identified as worst performers

Performance across all property segments can vary within the rising-rate period. REITs that tend to lease space on a short-term basis have mostly outperformed those with longer-term leases, as the former were allowed to adjust leases rapidly during sudden changes in economic conditions.

The pattern was also observed in the current rising-rate environment, as the S&P Dow Jones US Select Short-Term REIT Index posted an annualized total return of 26.2%, relatively higher than the medium-term and the long-term total returns of 12.7% and 4.1%, respectively. The varying performances across some sectors became even more apparent recently, with the impact of the COVID-19 pandemic on the population's activity over the last couple of years.

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The hotel sector, with its fast turnaround of tenants, has been the best performer in prior rising-rate periods and is also among the top three sectors in the current period. Hotel REITs were able to get an annualized total return of 27.1% from Aug. 4, 2020, through July 1.

When the pandemic hit in 2020, the hotel sector was heavily impacted early on, as many states mandated that residents stay at home and nonessential businesses close temporarily, which in turn led to the sector's lower earnings and occupancy rates for the entire year. However, the sector easily saw significant improvements the following year, although its overall performance was still below pre-pandemic levels.

On the flip side, the office sector, which ranked in the middle of the pack during historical rising-rate periods, is the sole sector with a negative return of 1.2% in the current period. During the onset of the COVID-19 lockdown, office landlords were already bracing for the unknown impact that this would have on office real estate. The increased adoption of the work-from-home arrangement also became a growing concern, putting pressure on rent and office occupancy in the subsequent years.

REITs beat broader market after rate hike announcements

Since 2003, the U.S. Federal Open Market Committee has made a total of 29 rate-increase announcements, and on average, U.S. REITs have outperformed the S&P 500 in the 30-day, six-month and one-year periods following the rate hikes.