Over the past five years, U.S. REITs have delivered annualized returns of around 8%—a respectable figure that has lagged general equities, but aligns with REITs’ long-term historical performance. In 2023, despite the 10-year Treasury yield ending the year unchanged at 3.9%, U.S. REITs posted a nearly 14% total return. In 2024, even as the yield climbed to 4.6%, REITs still managed a positive return of nearly 9%. These figures suggest that while interest rates remain influential, they are not the sole determinant of REIT performance. Investors are beginning to recognize the sector’s resilience and its potential for long-term value creation.
A Sector Built for Steady Growth
REITs are not designed to deliver explosive growth. Instead, they offer contractual income streams, moderate appreciation, and potential diversification benefits. It’s a slow and steady sector with contractual income intended to serve as a diversifier and steady compounder. This characteristic makes REITs particularly appealing in environments where market volatility and concentration risk are top of mind.
Historically, REITs have generated annual returns in the 8% to 10% range, driven by rental income, property appreciation and disciplined capital management. While recent years have tested investor patience, the sector’s ability to rebound amid challenging conditions underscores its durability.
Supply Constraints and Strong Balance Sheets
One of the most promising developments for REITs is the tightening supply across key property subsectors. Following a surge in construction activity during the pandemic, new development has slowed considerably. Property types such as industrial logistics, multifamily housing and self-storage are now seeing drastically reduced supply pipelines, which could lead to improved rental growth and occupancy rates in the coming years.
This supply-side discipline is complemented by robust corporate balance sheets. Listed REITs today operate with an average leverage of around 30%—roughly half that of their private market counterparts. This financial strength positions REITs to weather economic headwinds and capitalize on acquisition opportunities as distressed assets come to market.
Moreover, the sector’s access to public capital markets provides a strategic advantage. REITs can raise equity or debt efficiently to fund growth initiatives, unlike private real estate owners who may face liquidity constraints or a mismatch in timing between capital raising and the availability of opportunistic investments. This flexibility enhances REITs’ ability to respond to market shifts and pursue value-accretive investments.
Secular Growth Themes Driving Demand
Beyond cyclical recovery, several secular trends are fueling demand in specific real estate segments. One standout is digital infrastructure. The proliferation of cloud computing, artificial intelligence and data consumption has created unprecedented demand for data centers. These facilities, which house servers and networking equipment, are essential to the digital economy and are experiencing near-zero vacancy rates in major markets.
REITs specializing in data centers are uniquely positioned to benefit from this trend. Their scale, expertise and access to capital enable them to develop new capacity and meet rising demand. Development yields in this space are currently in the double digits, offering attractive returns for investors.
Healthcare real estate is another area of opportunity. Aging populations in developed markets are driving demand for senior housing and medical office buildings. The 85+ age cohort is growing rapidly, and with limited new construction in senior living facilities, existing properties are poised to see higher occupancy and rental rates. Similarly, medical office buildings are benefiting from increased outpatient care and demographic-driven healthcare utilization.
Diversification and Portfolio Construction
For investors seeking diversification, REITs offer exposure to tangible assets and income streams that are not closely correlated with traditional equities. In an era where large-cap technology stocks dominate index performance, real estate provides a counterbalance. REITs typically yield around 4%, compared to 1.5% to 2% for the S&P 500, potentially offering a meaningful income advantage.
Additionally, REITs can serve as an inflation hedge. Many lease agreements include rent escalators tied to inflation, and property values tend to rise with replacement costs. This makes REITs a useful tool for preserving purchasing power in inflationary environments.
Looking Ahead
The outlook for REITs is increasingly constructive, and with the sector having materially lagged broader equities in recent years, today’s entry point is compelling. With interest rates having likely seen their cyclical peak, supply dynamics improving and secular growth themes gaining traction, the sector is well-positioned for a comeback. REITs history of steady performance and income generation could make them a valuable component of a balanced portfolio.
As investors reassess their allocations in light of macroeconomic shifts, we believe REITs deserve renewed attention. Their ability to compound returns over time, navigate complex market environments, and tap into long-term growth drivers underscores their relevance in today’s investment landscape.