Insights

REITs outperformed the broader market in the first quarter of 2026. Portfolio Manager Eric Rothman discusses the drivers of performance, including improving rate stability, attractive valuations, and rotation into value sectors, as well as where he is seeing opportunities in public real estate.

The FTSE Nareit All Equity REITs Index rose nearly 4% in the first quarter of 2026 compared to -4% for the S&P 500. What drove this outperformance?

REIT outperformance in early 2026 reflects a combination of improving fundamentals, attractive valuations, and a shift in market leadership. After several years of lagging broader equities, REITs entered the year trading at a meaningful discount to the S&P 500, setting up a catch-up opportunity as that gap began to narrow.

At the same time, market leadership has broadened beyond technology and AI-oriented investments into more value-oriented and incomegenerating sectors. In a more volatile market environment, investors have also gravitated toward REITs for their defensive characteristics, stable cash flows, and dividend income. Strong underlying property fundamentals and resilient operating performance have further supported returns, allowing REITs to outperform the broader market during the quarter.

How should Advisors think about REITs in the current environment?

Advisors should view REITs more constructively in the current environment, particularly as interest rate dynamics have shifted. While REITs are sensitive to rate sentiment, the stability of rates matters more than the absolute level of rates. As of March 31, 2026, the 10-year Treasury rate was approximately 4.3%, near its long-term historical average, and has remained relatively stable in recent months. The shift toward a more stable rate environment marks a significant improvement from the volatility and rapid increases seen during the prior hiking cycle, which weighed on REIT performance.

With expectations for modest Federal Reserve rate cuts in 2026 and a more benign outlook, sentiment toward REITs has improved. After several years of underperformance, REITs now trade at a notable valuation discount relative to broader equities. We believe this combination of stable rates, improving sentiment, and attractive relative valuations creates a more supportive backdrop for REITs going forward.

How have AI developments affected REITs?

AI is creating a significant opportunity for REITs, particularly through the massive buildout of data centers, one of the largest investment cycles in history. Data centers, a key segment of the REIT market, are seeing strong demand, robust leasing activity, and favorable fundamentals. In contrast, the office sector faces a more nuanced impact. While fears that AI could reduce white-collar jobs have pressured sentiment, especially in office REITs, AI companies themselves, particularly in tech hubs in San Francisco, are actively leasing new space, creating a counterbalancing source of demand.

Beyond these areas, AI’s impact on most REIT sectors is limited. Residential housing remains essential, supporting apartment demand, while healthcare and senior housing face little direct disruption. Retail properties also remain relevant as consumers continue to shop in physical locations.

Where are you seeing opportunity in REITs?

We are particularly constructive on Healthcare REITs, with a focus on Senior Housing. Demographic trends are highly supportive, with more than 10,000 baby boomers in the U.S. estimated to turn 80 every day from 2026 through 2044, a key stage for transitioning into these facilities. At the same time, new supply has been limited for several years, while occupancy is recovering following post-Covid softness and rents are beginning to rise. Operators also benefit from stable access to capital, enabling external growth and reinforcing a favorable cycle of improving cash flow and operations.

We also see compelling opportunities in open-air shopping centers. Despite persistent concerns about e-commerce, these assets remain essential for service-oriented and convenience-based retail. Supply has been extremely constrained, occupancies are near record highs, and tenant demand is strong. In addition, retailers are increasingly leveraging omni-channel strategies to drive foot traffic, supporting resilient fundamentals and durable earnings growth.