Interest rates are on the rise and Real Estate Investment Trusts (REITs) have been struggling.

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The iShares U.S. Real Estate ETF (IYR) has fallen nine straight days, the longest streak since its inception in 2000.

If you listen to the pundits, they will tell you that rising rates are the culprit. You’ll often hear that higher interest rates are unquestionably bad for REITs.

That may be the case in recent weeks, but if we look at the longer-term evidence, just how tied to interest rates are REIT returns?

As it turns out, not as much as you might think.

We have data on the FTSE/NAREIT U.S. Equity REIT Index going back to January 1972. Since then, the monthly correlation of REIT returns to changes in the U.S. 10-year yield is close to zero: -0.08. In plain English this means that it is nearly impossible to predict the direction of REIT returns based on the direction of interest rates.

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There have been times when REITs have done well during periods of rising rates and other times when they have done poorly. Similarly, there have been times when REITs have done well during periods of falling rates and other times when they have done poorly.

In recent years, falling interest rates have actually been the greater concern. In 2007, 10-year yields fell by 68 basis points while REITs declined 15.7%. The next year (2008) was the worst year in history for the Equity REIT Index (-37.7%), a year in which the 10-year yield fell by 181 basis points. In the following year, 2009, interest rates rose 163 basis points while REITs had one of their best years ever (+28.0%).

How is that possible? Well, a more important driver of REIT performance than interest rates is economic growth. Stronger economic growth tends to lead to higher occupancy rates and rents which lead to higher earnings for REITs. Oftentimes, stronger economic growth is accompanied by higher interest rates, as it was in 2009. While this rise in rates may have some negative effects on earnings (ex: higher financing costs) and demand (ex: investors require higher dividend yield), the increase in growth seems to more than counteract this. And the opposite situation, lower rates with lower growth, is far worse.

This is another way of saying that REITs are much more equity-like in their behavior than bond-like. With a monthly correlation of 0.58 to the S&P 500 since 1972, we should expect them to move in the same direction of the broad equity market more often than not.

That’s not to say that rising rates are never an issue for REITs. There is some evidence there – it just seems to be more of a relative performance issue than absolute. Overall, REITs have done significantly better relative to the S&P 500 during months of falling rates (3.9% outperformance) than rising rates (0.6% underperformance). They’ve also exhibited higher volatility than the broad equity market in months of rising rates (4.1% higher versus 0.3% lower).

If you believe that interest rates will continue to rise, then, it would seem to be prudent to temper your return and volatility expectations for REITs in the years to come. That doesn’t mean REITs have to decline on an absolute basis, but relative returns could very well suffer. Given that REITs have outpaced the S&P 500 by 1.6% a year since 1972, such a mean reversion would not be that surprising.

Should REIT investors hope for falling rates, then? Not necessarily, for if those falling rates are associated with economic weakness (as we saw in 2008) that would be a far greater risk to REIT returns.

The lesson here?

When it comes to REITs, the direction of interest rates and their impact on returns are far from clear. As such, most investors would be better served determining an appropriate long-term allocation than trying to time REITs based on interest rate predictions. For even if they got the direction of interest rates correct (no small task), they could not be sure how REITs would react.