Real estate

Why US REITs may shine in a rate-cutting environment

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Key takeaways

Historical outperformance

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For nearly five decades, US REITs have delivered stronger returns than broad US stocks in the 12 months following Federal Reserve easing cycles.1

Lower rates may enhance appeal

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Rate cuts may increase the attractiveness of REIT dividends, potentially making them a compelling option for investors seeking yield potential and portfolio diversification.

Potential REIT sector beneficiaries

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Data centers, telecom infrastructure, and health care REITs have historically benefited the most from lower rates due to long-duration leases and capital-intensive models.

With the first Federal Reserve (Fed) interest rate cut in the books and a pivot toward easing monetary policy, investors may want to consider sectors that have historically thrived in lower-rate environments, including US real estate investment trusts (REITs). These income-generating real estate securities have historically shown resilience, and even outperformance, following rate cuts. With macroeconomic conditions shifting, the current environment may present a compelling entry point for investors.

REITs are particularly sensitive to interest rates because of their reliance on debt to finance property acquisitions and development. Lower rates reduce borrowing costs, boost valuations, and increase investor demand for yield, helping create a favorable backdrop for REIT performance. Rate cuts are typically aimed at stimulating economic growth, which can translate into higher occupancy and stronger rent growth. These dynamics support REIT fundamentals, which can be good for REIT share prices.

REITs are required to distribute a substantial portion of their taxable income as dividends. In lower interest rate environments, these dividend distributions may appeal to investors seeking income-oriented strategies.

Real estate has historically outperformed after rate cuts

Lower interest rates play a critical role in shaping REIT performance. By reducing borrowing costs, rate cuts can enhance property values, lower financing expenses, and strengthen dividend-paying business models, which are some of the key drivers of REIT performance. For nearly five decades, REITs have consistently outpaced broader US stocks following Fed easing cycles.1 In the 12 months after a rate cut, US REITs delivered an annualized return of 9.48%, compared to 7.57% for US stocks.1

Why REITs tend to respond positively to rate cuts

1. Lower cost of capital

REITs often rely on debt to finance acquisitions and development. Rate cuts reduce interest expenses and improve the economics of new investments. Lower interest rates reduce borrowing costs, making it easier for REITs to refinance debt and pursue new acquisitions. This environment may also support investor interest in REITs due to their income-distribution characteristics.

2. Attractive yield profile

In a lower-rate environment, the dividend distributions typical of REITs may appeal to investors seeking income-generating strategies. For those focused on income, REITs can offer exposure to real estate with potential for both yield and long-term value creation.

Not all REITs react the same way

While the overall sector tends to benefit, some property types respond more favorably than others. Based on historical data and recent trends, the greatest beneficiaries of rate cuts include data center, telecommunication, and health care REITs. These sectors often combine strong secular demand with capital-intensive business models, making them more responsive to lower rates.

On the other hand, lodging, malls, and apartment REITs have shown more muted reactions. These segments may be more influenced by short-term economic cycles and consumer behavior. For example, lodging REITs are highly cyclical and tied to travel demand, which may not immediately rebound with rate cuts.

What this means for investors

For investors seeking income potential, diversification, and inflation-sensitive assets, listed real estate may offer compelling opportunities in a post-rate-cut environment. We believe that based on historical data, REITs could be well-positioned for the next phase of the cycle.

Also, REITs can serve as a strategic allocation in portfolios aiming to balance risk and return potential. Their ability to potentially generate income, provide exposure to real assets, and respond positively to monetary easing makes them a versatile tool in today’s investment landscape, in our opinion.

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    Sources: Invesco and Bloomberg L.P., since the earliest common inception. Monthly return data analyzed between Jan. 1, 1976–July 31, 2025. Easing cycle start dates begin the first of the month when a rate cut is implemented: Apr. 1, 1980; June 1, 1981; Sept. 1, 1984; June 1, 1989; Jan.1, 2001; Sept.1, 2007; and Aug. 1, 2019. Real estate is represented by the FTSE Nareit All Equity REITs Index and US stocks by the S&P 500 Index. Past performance does not guarantee future results