Insights

The commentary covers drivers of REIT performance, the impact of interest rates and limited new supply, opportunities across property sectors, and his outlook for the year ahead.

What factors are supporting REIT returns in the current higher rate environment?

REITs have benefited from several factors, despite higher interest rates. Valuations adjusted to higher rates several years ago, and further increases from elevated levels tend to have less impact. For example, a 50-basis-point increase in the 10-year Treasury yield from 4.75% to 5.25% is less impactful than an increase from 1% to 1.5%.

While we anticipate one or two additional Fed rate increases, public REITs generally have a financing advantage over private real estate owners. They often carry less than half the leverage and have longer debt maturities, reducing their exposure to higher borrowing costs.

Inflation is also limiting new supply. Higher construction costs have discouraged development, and previous supply pressures in industrial and apartment markets have eased. With fewer projects entering the pipeline, we expect limited new supply to support property fundamentals over the next several years.

We remain constructive on the REIT outlook. A healthy economy, solid occupancy and steady rent growth support durable earnings growth, which we believe is driving performance more than the direction of interest rates.

Which real estate sectors could benefit most from limited new supply?

We believe limited new supply supports pricing power across all REIT sub-sectors. With long-term interest rates unlikely to return to 3%, higher financing costs should continue to constrain the development pipeline.

Data centers, in particular, may benefit despite being an area of active construction. Higher costs, local opposition and development moratoriums create hurdles for new projects. While those constraints can delay expansion, they also limit competing supply, potentially strengthening pricing power for existing data center owners.

Where are you finding opportunities across property sectors?

We see opportunities in single-family rental and manufactured housing. Single-family rental valuations reset following presidential comments about housing policy, creating a market dislocation that we used to add exposure.

We also see tactical opportunities in office properties, where availability is tightening for high-quality buildings in desirable geographic markets. We are becoming more constructive on industrial properties and continue to favor shopping centers, senior housing and data centers.

We remain more cautious on apartments. Slower job growth and household formation, along with lingering supply pressures, are weighing on fundamentals.

What is your outlook for REITs over the next year?

We expect earnings growth and property fundamentals to remain the primary drivers of REIT returns. While expectations point to one or two additional rate increases in 2026 and potentially another in early 2027, interest rate pressures could begin to ease beyond that period. An easing of tensions in the Middle East could also reduce inflation pressures and support a more favorable rate environment.

If economic activity and consumer spending remain healthy, limited new supply should allow demand to absorb vacant space, strengthening occupancy and pricing power. Real estate fundamentals tend to improve gradually, but the limited development pipeline provides support for continued growth.