What happened

Shares of Digital Realty (DLR 1.50%) rebounded by 16.1% in November, according to data provided by S&P Global Market Intelligence. After a tough start to the year, the real estate investment trust (REIT) rallied sharply during the month, largely thanks to the news that inflation wasn't rising as much as investors had expected.

So what

On the one hand, November was a relatively quiet month for Digital Realty. There wasn't much in the way of news specifically about the data center REIT. 

Indeed, the only company-specific news of note was that it priced a public offering of $350 million of additional 5.55% notes due in 2028. It had previously issued $550 million of notes at that rate and maturity. The additional capital will allow Digital Realty to temporarily repay borrowings under its revolving credit facility. That will give it the financial flexibility to acquire additional data centers, fund development opportunities, or invest in interest-bearing accounts. The company's ability to access debt capital at a reasonable rate in a rising interest rate environment showcases its financial strength. 

Meanwhile, last month's big catalyst for the rally was improving inflation numbers. The Consumer Price Index didn't rise quite as much in October as economists were predicting. It dropped to 7.7% year over year, its smallest increase since January. The Consumer Price Index hit what appears to have been its cyclical peak of 9.1% in June, and has been falling ever since.

That led investors to believe that the Federal Reserve might slow the pace of its interest rate hikes. That's potentially good news for REITs, which borrow heavily to fund their expansion. In addition, higher interest rates make yield-focused investments like government bonds more attractive to income-focused investors. Because of that, when interest rates rise, REITs' stock prices often fall -- driving their dividend yields higher -- to compensate investors for their higher risk profile. 

That latter factor has undoubtedly weighed on Digital Realty this year. Its tumbling stock price drove its dividend yield to more than 5% at one point. 

However, based on the prospect that interest rates might be approaching their near-term peak, investors bid up REITs as a class by 6% in November. Even in the wake of that surge, the sector remains down by about 20% on the year. Digital Realty was hit harder than most. Its stock price is still down by almost 40% year to date. 

Now what

REITs' stock prices have been under a lot of pressure this year because the Federal Reserve has rapidly increased interest rates to fight inflation. That's pushed up their dividend yields, making them more attractive to income-seeking investors. Now, with inflation starting to moderate, the Federal Reserve may soon follow suit, which could in turn relieve some of that downward pressure on REITs' share prices. Because of that, now would be a good time to scoop up shares of high-quality REITs like Digital Realty, which still offers an attractive dividend yield (currently 4.5%) even after last month's rebound.