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.

Would you please discuss REITs’ strong year-to-date performance versus the overall market?

On a year-to-date basis, the FTSE Nareit All Equity REITs Index rose an impressive 15% compared to the S&P 500 Index’s 10%. REITs’ relative strength reflects several factors, including renewed investor appreciation for diversification, durable income, and low correlation to other financial assets. After several years of underperformance versus the broader equity market, REITs entered the period with attractive relative valuations, particularly as market leadership is concentrated in artificial intelligence (AI) driven areas of the S&P 500.

The interest rate backdrop has also become less disruptive. While REITs remain sensitive to rate expectations, the sharp move from near-zero rates to more than 4% is behind us, and smaller changes in rates are less impactful than they were earlier in the cycle.

Historically, REITs have held up relatively well during periods of market volatility and have often performed differently than AI-driven sectors. REITs’ diversification benefit, combined with real asset exposure and durable income streams, has helped support investor interest in the space.

How has the changing interest rate outlook impacted REITs?

At the beginning of the year, the market expected one or two Federal Reserve rate cuts. Today, expectations have shifted, with the possibility of a rate hike by year-end. Importantly, we continue to believe REITs do not need rate cuts to perform well, and year-to-date performance has reinforced our view.

For real estate, the long end of the yield curve matters more than the short end, particularly the 10-year Treasury. While the 10-year yield moved higher following the geopolitical conflict and reached the mid-4% range, it has generally remained relatively contained. That is very different from the sharp reset in rates we experienced several years ago, when the move from near-zero rates to more than 4% had a significant impact on real estate values.

Inflation remains an important variable, particularly given recent volatility in energy prices. However, oil prices have since moved back closer to preconflict levels, which could make any inflationary impact more temporary. If inflation remains contained, the Federal Reserve may not need to take significant action.

What is your outlook for data centers given their strong performance and connection to AI infrastructure spending?

Data centers remain one of the clearest beneficiaries of AI infrastructure spending, and demand continues to be supported by hyperscale cloud growth, enterprise adoption, and the need for additional computing capacity. At the same time, the sector has become closely tied to AI sentiment, which can create short-term volatility as the market evaluates the pace and sustainability of future growth.

We remain constructive on the long-term opportunity but are also mindful of elevated valuations and the potential for supply to eventually catch up with demand. Expectations are high, and even a modest slowdown in growth could weigh on sentiment.

As a result, we are maintaining a measured overweight to data centers, with a focus on established companies with a strong access to capital, development capabilities, existing campus expansion opportunities, and diversified customer demand across hyperscale, co-location, enterprise, and retail.

Where do you see the opportunities within healthcare real estate?

We continue to see the greatest opportunity in seniors housing. As we discussed last quarter, the demographic backdrop remains highly favorable, with demand supported by the aging baby boomer population. At the same time, operating fundamentals continue to improve, lease structures have become more attractive, and new supply remains limited following a prior period of overbuilding.

The shortage of senior housing is important. Even if development were to pick up today, it would take several years before new supply became meaningful. In our view, this trend creates a long runway for continued occupancy gains, rent growth, and consolidation across the industry.

We are also finding select opportunities in skilled nursing facilities, an area that has been somewhat overlooked. We have modestly increased exposure there, although seniors housing remains the primary focus within healthcare real estate.