Real estate investors have long relied on rental income and dividends to generate returns. But what happens if the era of cheap borrowing does not return for decades? Canary Capital founder and CEO Steven McClurg believes investors may be entering a prolonged bond bear market, a shift that could challenge the economics of property ownership and the appeal of real estate investment trusts (REITs).

McClurg argues that the 34-year bond bull market ended in 2016 and that the U.S. could be in the early stages of another secular bear market, potentially lasting more than 30 years. "A secular bond bear market will likely last for 30+ years. We are 10 years in already, as the yield has moved from 1.37% at the lowpoint in 2016," he warned in an interview with MarketDash.

McClurg also forecasts that 10-year Treasury yields could reach 8% within four years.

That outlook has implications for real estate, where borrowing costs, property valuations and income yields are closely linked to interest rates.

"Real estate is probably the asset that will be most impaired, as higher mortgage rates will cause demand shortages," McClurg said.

Why a Long Bond Bear Market Matters for Real Estate

A prolonged period of higher interest rates could put pressure on REITs through several channels. Refinancing debt could become more expensive, property valuations could face higher discount rates, and dividend-paying REITs could lose some of their appeal as Treasury yields rise.

Higher mortgage rates could also weaken housing demand and make property purchases less affordable. Commercial real estate owners could face additional challenges if refinancing costs rise faster than rental income.

McClurg's thesis rests on structural forces, including government borrowing, defense spending and the capital-intensive expansion of artificial intelligence. If these forces keep long-term yields elevated, real estate companies could face a very different financing environment from the one that supported much of the post-2008 property recovery.

However, the impact would vary across sectors. REITs with strong balance sheets, longer-term fixed-rate debt and resilient rental demand may be better positioned than highly leveraged businesses with significant near-term refinancing needs.

McClurg questioned real estate's role as a defensive investment when interest rates rise. Asked which asset investors might rely on for protection against higher rates only to find it fails to deliver, he answered bluntly: "Real Estate." His concern is that persistently higher borrowing costs could undermine property demand, increase refinancing expenses and weaken the income appeal of REITs.

Three REIT ETFs to Watch

Vanguard Real Estate ETF (NYSE:VNQ)

VNQ offers broad exposure to publicly traded U.S. real estate companies and REITs. Its performance can help investors assess how the wider listed property sector responds to rising yields and changing financing conditions.

Real Estate Select Sector SPDR Fund (NYSE:XLRE)

XLRE focuses on real estate companies in the S&P 500. It provides exposure to larger listed property businesses, although its narrower universe differs from the broader REIT market.

iShares Mortgage Real Estate ETF (BATS:REM)

REM invests in mortgage REITs, which hold mortgages and mortgage-related securities rather than primarily owning physical properties. These businesses can be particularly sensitive to funding costs, interest-rate spreads and changes in mortgage-backed securities valuations.

These ETFs illustrate different forms of real estate exposure; McClurg did not specifically recommend them.

Could REITs Lose Their Income Advantage?

The risk is not simply that Treasury yields rise sharply once. If McClurg's secular bear-market thesis proves correct, investors could face an extended period in which higher risk-free yields compete with REIT dividends and borrowing costs remain elevated.

Still, a 30-year bond bear market is a forecast, not a certainty. Rental growth, property supply, leverage and individual financing structures will continue to shape REIT performance.

Whether real estate can preserve its income appeal when bonds offer more competitive yields and refinancing becomes more expensive is the real concern.