Rising Mortgage Rates Weigh on U.S. Real Estate as Data Centers Draw Investment

Higher Borrowing Costs Reshape the Real Estate Market

The U.S. real estate market is facing renewed pressure as rising interest rates increase financing costs, weaken housing affordability and weigh on real estate investment trusts (REITs). Mortgage rates have climbed toward 7.5%, while higher Treasury yields have contributed to a broader selloff in property-related investments.

Yet the market is far from uniform. Cash buyers are accounting for a majority of home purchases in several major metropolitan areas, while investors continue to identify demand in specialized real estate sectors such as senior housing and data centers. The result is an increasingly divided market in which financing conditions, property type and access to capital are producing different outcomes.

Key Points

• Higher interest rates are pressuring real estate. Mortgage rates near 7.5% are limiting affordability, while rising bond yields have weighed on REIT valuations and increased financing costs.
• Cash buyers are reshaping housing demand. All-cash purchases exceeded mortgage-financed transactions in seven of the nation's 50 largest metropolitan areas during the first quarter of 2026.
• Specialized real estate is attracting attention. Data centers and senior housing continue to draw investment interest, although AI infrastructure projects face regulatory, financing and construction risks.

Rising Interest Rates Put Pressure on Housing and REITs

The latest increase in borrowing costs is creating challenges across the U.S. real estate market.

Mortgage rates have risen toward 7.5%, reducing affordability for households that depend on financing. Higher monthly payments can limit purchasing power, contributing to slower housing transactions and weaker refinancing activity.

The pressure extends beyond residential property.

Real estate investment trusts, which own or finance income-producing properties, have also struggled as Treasury yields climbed.

Higher bond yields can make income-oriented real estate investments less attractive relative to government securities. They also increase borrowing costs for property owners and developers, affecting financing decisions and the economics of new projects.

The Vanguard Real Estate ETF (VNQ), one of the largest funds tracking the sector, declined approximately 7% over the past month, according to the supplied market data.

Real estate stocks remain roughly 15% below their early-2022 highs, reflecting the longer-term impact of rising interest rates.

However, property fundamentals vary considerably across the sector.

Brian Cordes of Cohen & Steers noted that demand for high-quality office, retail and multifamily properties has improved in several markets.

At the same time, expensive financing has constrained new construction, limiting the development of additional supply.

This combination creates a complicated environment.

Existing properties may benefit from reduced competition from new construction, but their valuations and financing costs remain exposed to elevated interest rates.

Derek Schug, head of portfolio management at Kestra Investment Management, told Barron's that current real estate valuations are attractive, although further interest rate increases could push prices lower.

The performance of publicly traded real estate funds reflects these competing forces.

The Real Estate Select Sector SPDR Fund (XLRE), which tracks major real estate companies in the S&P 500, reported a one-year return near zero as of early October.

The iShares Select U.S. REIT ETF (ICF), which holds a concentrated portfolio of established REITs, reported a stronger one-year return of approximately 4.5%.

Both funds have substantial exposure to major property operators, including Welltower (WELL), Prologis (PLD) and Equinix (EQIX).

The differences illustrate how portfolio composition can influence results even among funds investing in the same broad sector.

Why Are Cash Buyers Gaining Influence in the Housing Market?

Rising mortgage rates are affecting homebuyers unevenly.

For households that depend on financing, higher borrowing costs reduce affordability. Buyers with sufficient cash or existing home equity face fewer direct constraints from mortgage rates.

That distinction is becoming increasingly visible in U.S. housing transactions.

According to property analytics firm Attom, all-cash buyers accounted for more than half of home purchases in seven of the nation's 50 largest metropolitan areas during the first quarter of 2026.

Florida was particularly prominent.

In Cape Coral, approximately 59% of home purchases were completed without a mortgage. North Port followed at 56%, while Miami also recorded a majority of cash transactions.

These markets attract second-home buyers, relocating households and property owners who can use accumulated equity to purchase another home.

Rob Barber, CEO of Attom, explained that markets with a large proportion of cash buyers may be less sensitive to rising mortgage rates because fewer transactions depend on financing.

The pattern is not limited to Florida.

Atlanta and Birmingham, Alabama, also recorded majority-cash transactions, with institutional investors accounting for a meaningful share of purchases.

In both metropolitan areas, more than one in ten buyers were institutional investors during the first quarter.

Other markets, including Cleveland and Albany, New York, stand out for their relative affordability.

Lower property prices can make outright purchases more accessible to households and investors with available capital.

However, cash purchases do not eliminate broader housing market pressures.

Local economic conditions, housing policies and changes in demand can still affect property values and transaction activity.

Barber noted that rising rates can reduce the overall buyer pool even in markets with substantial cash activity.

The growing divide is particularly evident in higher-priced properties.

Lisa Sturtevant, chief economist at Bright MLS, reported that approximately one-third of luxury home sales in the firm's markets involve all-cash transactions.

TD Cowen researchers described the development as a K-shaped housing market, referring to a situation in which different groups of buyers experience sharply different economic conditions.

Wealthier households and buyers with accumulated equity continue to participate in the market, while mortgage-dependent buyers face greater affordability constraints.

The result is a housing market in which purchasing power increasingly depends on access to existing wealth rather than borrowing capacity alone.

Data Center REITs Face Growing Risks Despite AI Investment Demand

While traditional real estate faces pressure from higher interest rates, data centers have emerged as a prominent investment theme.

Demand for artificial intelligence computing infrastructure has encouraged major investment firms to expand their exposure to properties supporting cloud computing, data storage and AI applications.

Blackstone (BX) has been among the most active participants.

Its Blackstone Digital Infrastructure Trust (BXDC), a publicly traded REIT launched in May 2026, was designed to provide investors with exposure to established data center properties.

The fund sold shares at $20 during its debut but had declined approximately 16% by early October.

Blackstone's strategy emphasizes mature data center markets, including Northern Virginia and Dallas, where facilities and supporting infrastructure are already established.

Other investment managers are pursuing similar opportunities.

Blue Owl Capital (OWL), which operates a private digital infrastructure investment platform, has reportedly considered launching a publicly traded data center REIT.

The company reports ownership of more than 130 data centers across 32 global markets.

Brookfield Asset Management (BAM) also expanded public-market access to digital infrastructure through the July listing of its data center services company, Csquare.

However, Csquare shares had also declined nearly 16% since their debut.

These developments demonstrate that growing demand for AI infrastructure does not necessarily translate into immediate positive stock performance.

The sector faces several challenges.

Data centers require substantial investment in construction, electricity, cooling systems and network connectivity.

Their financial performance can also depend heavily on a limited number of large technology customers.

Regulatory opposition has become another important consideration.

New York and Texas introduced restrictions on new hyperscale data center approvals during 2026, reflecting growing public concern about the facilities' impact on local communities and infrastructure.

National polling cited in the supplied reporting found that a majority of Americans oppose new data center construction in their communities.

These developments can affect project timelines and financing assumptions.

Oracle (ORCL) experienced investor concern in September after issuing a force majeure notice associated with Project Jupiter, a New Mexico data center development connected to the broader Stargate AI initiative.

The notice concerned potential payment delays if the project failed to become operational by 2028, although Oracle stated that development remained on schedule.

Beyond construction and permitting, data center investors also face refinancing risks, technological changes and potential disruptions from natural disasters.

Private investment vehicles introduce additional considerations involving liquidity.

Unlike publicly traded REITs, some private funds restrict when investors can withdraw capital.

That distinction becomes important when underlying assets are large, expensive properties that cannot be sold quickly.

Despite these challenges, industry specialists continue to identify long-term demand for high-quality data center facilities.

The investment question increasingly centers on the distinction between established properties generating rental income and development projects that still require substantial capital, approvals and infrastructure.

What It Means for Investors

The U.S. real estate market is becoming more differentiated as higher interest rates affect property types and investment vehicles in different ways.

Traditional housing remains constrained by mortgage affordability, while cash-rich buyers continue to support transactions in selected metropolitan areas.

For publicly traded REITs, higher bond yields create pressure through financing costs and competition from fixed-income investments.

However, operating fundamentals vary across property categories.

Senior housing has attracted attention because of demographic demand, while data centers benefit from the expansion of AI infrastructure.

Other areas, including cell towers and single-family rental properties, have drawn interest from managers evaluating sectors that have experienced valuation declines.

The performance of real estate ETFs also highlights differences in investment exposure.

The Schwab U.S. REIT ETF (SCHH) provides diversified exposure to domestic REITs, including healthcare, logistics and data centers.

Its reported one-year return of 6.53% compares with a negative 7.2% return for the Xtrackers International Real Estate ETF (HAUZ), illustrating the recent difference between domestic and international property markets.

Within U.S. real estate, XLRE and ICF hold many of the same major companies but differ in portfolio weightings, expenses and distribution yields.

These differences matter because broad real estate performance does not necessarily reflect the results of every underlying property segment.

The growth of publicly traded data center investment vehicles adds another dimension.

Although AI infrastructure demand remains substantial, investors face exposure to construction delays, regulatory restrictions, customer concentration and financing costs.

Private real estate investments can carry additional restrictions on access to capital.

Taken together, the latest developments indicate that the real estate sector cannot be evaluated solely through the direction of mortgage rates or property prices.

Financing conditions, tenant demand, asset quality, geographic exposure and investment structure are increasingly important in explaining differences across the market.

Conclusion

The U.S. real estate market is adjusting to an environment of elevated interest rates, weaker housing affordability and growing differences between property sectors.

Mortgage-dependent homebuyers face increasing financing costs, while cash buyers account for a majority of transactions in several major metropolitan areas.

Publicly traded REITs continue to contend with rising Treasury yields, although selected property categories benefit from underlying demand and limited new supply.

At the same time, data centers are attracting substantial investment as artificial intelligence infrastructure expands.

The sector's growth is encouraging major financial firms to create new investment vehicles, but regulatory opposition, construction challenges and financing risks are complicating the outlook.

The broader market signal is one of increasing differentiation.

Rather than moving uniformly, U.S. real estate is reflecting the combined influence of borrowing costs, access to capital, demographic demand and technology-driven infrastructure investment.

FAQs

Why are rising interest rates putting pressure on U.S. real estate?

Higher interest rates increase mortgage payments and property financing costs. They also make income-producing real estate investments less attractive relative to higher-yielding bonds, placing pressure on property valuations and REIT share prices.

Why are cash buyers becoming more important in the housing market?

Cash buyers do not depend directly on mortgage financing, making them less sensitive to rising mortgage rates. During the first quarter of 2026, cash purchases represented more than half of home transactions in seven of the nation's 50 largest metropolitan areas.

Which real estate sectors are attracting investor interest?

Senior housing and data centers are attracting attention because of demographic demand and AI infrastructure investment. Some investment managers are also examining cell towers, single-family rental properties and selected hospitality assets.

What risks do data center REITs face?

Data center REITs face risks involving construction delays, electricity availability, permitting restrictions, high capital requirements, tenant concentration and refinancing costs. Private investment vehicles may also impose restrictions on investor withdrawals.

How do real estate ETFs differ from one another?

Real estate ETFs differ in geographic exposure, property holdings, expenses and income distributions. Funds such as XLRE and ICF focus on U.S. real estate companies, while SCHH provides broader domestic REIT exposure and HAUZ invests in international property markets outside the United States.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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