Insights

Portfolio Manager Eric Rothman discusses REIT subsector performance, the interest rate environment, REIT initial public offerings (IPOs), and his outlook for real estate.

Would you please discuss performance across the REIT subsectors in the first half of 2025?

With the increased volatility in the market over the past six months due to the tariff policy announcements, interest rate policy, and the inflation outlook, areas of the real estate sector that tend to be more defensive outperformed those that are more sensitive to the overall economy. Subsectors such as healthcare, cell phone towers, and net lease generally outperformed in the first six months of 2025 compared to hotels and regional malls, which tend to be more sensitive to changes in the economy, the consumer, and tariffs.

Would you please discuss the direction of interest rates as they pertain to real estate?

The Federal Reserve has delayed interest rate cuts primarily due to concerns over the potential inflationary impact of current fiscal policies. While inflation remains contained, the Fed is taking a cautious stance. However, markets continue to anticipate two rate cuts by year-end, likely in September and October, with up to six cuts possible through 2026. We agree with this broad view, contingent on stable economic data. If a sharp slowdown occurs, additional cuts could follow, but recent data has remained robust, reducing this possibility.

Importantly, the need for the Fed to raise rates appears unlikely in the near term. Oil prices have moderated, and commodity pressures on inflation remain subdued, giving the Fed flexibility to cut if conditions allow.

In summary, we see a cautious Fed with room to cut rates if inflation remains stable, potentially benefiting REITs assets while supporting a modestly lower rate environment. However, we expect near-term rate volatility.

Would you please discuss the REIT IPO market in 2025?

The REIT IPO market tends to be episodic, with activity often occurring in bursts rather than following a predictable pattern. More broadly, a key consideration is how much equity capital the REIT sector is raising, whether through IPOs or secondary offerings. Currently, the environment is supportive for REITs accessing capital. Although bond issuance paused briefly earlier this year, we have recently seen a meaningful pickup, with over $10 billion of bonds issued in the past six weeks alone. This surge reflects improved market conditions, as spreads have tightened and interest rates have moderated compared to levels 6-9 months ago, providing REITs with opportunities to issue bonds at attractive rates.

Additionally, the current environment has supported broader access to capital, including preferred equity, strengthening REIT balance sheets while reducing financing costs. As more debt maturities occur in the second half of the year, we expect continued issuance as REITs refinance older, higher-cost debt with more favorable terms.

While IPO timing remains uncertain, the REIT sector is well-positioned to raise capital, supporting growth strategies and maintaining financial flexibility in a period of stabilizing rates and constructive credit conditions.

What is your outlook for the REIT market over the next several months?

We are generally optimistic about the REIT market over the next 6–12 months for the following reasons:

1. Lower interest rate environment. While markets remain concerned about potential inflation, data suggests inflation risks are easing, reducing the likelihood of further rate increases. In the event of a potential slowdown in the economy, demand for defensive, yield-oriented assets such as REITs should increase. Even if growth remains steady, interest rates are likely to trend lower, which should be helpful to public real estate assets.
2. Attractive dividend yields and earnings growth potential. The economy remains resilient, and REITs continue to offer attractive dividend yields. Earnings growth, which bottomed in 2024, is expected to improve in 2025 and 2026, with a baseline near 4% and potential acceleration to 6% or higher. In a recession scenario, defensive demand for yield could further benefit REITs.
3. Many REITs are well-positioned. Supply pressures have eased, with residential and industrial overbuilding concerns having largely subsided, setting the stage for lower new supply to positively impact fundamentals in the coming quarters.

In addition, data centers are benefiting from secular artificial intelligence (AI) demand. The evolving AI landscape is shifting demand toward interconnection-focused facilities, benefiting operators. This demand is expected to persist regardless of economic conditions.