For nearly five decades, US REITs have delivered stronger returns than broad US stocks in the 12 months following Federal Reserve easing cycles.1
Rate cuts may increase the attractiveness of REIT dividends, potentially making them a compelling option for investors seeking yield potential and portfolio diversification.
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.
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
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.
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.
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.
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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We believe falling supply and strong demand should spur stronger rent growth in the next year or two. Some areas will see strong rental gains faster than others.
Its history of attractive long-term returns and inflation-beating income potential reinforces private real estate's place in today's portfolios.
Important information
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All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
Diversification does not guarantee a profit or eliminate the risk of loss.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. An investment cannot be made directly into the index.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
Investments focused in a particular sector, such as real estate, are subject to greater risk and are more greatly impacted by market volatility than more diversified investments.
Investments in real estate-related instruments may be affected by economic, legal, or environmental factors that affect property values, rents, or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies, and their shares may be more volatile and less liquid.
REITs are subject to additional risks than general real estate investments. The value of a REIT can depend on the structure and cash flow generated by the REIT. REITs concentrated in a limited number or type of properties, investments, or narrow geographic areas are subject to the risks affecting those properties or areas to a greater extent than less concentrated investments. REITs are subject to certain requirements under federal tax law and may have expenses, including advisory and administration expenses.
Fixed income investments carry risks such as interest rate changes and credit defaults. REITs may be more volatile and less predictable than fixed income investments, and are subject to market, interest rate, and property-specific risks.
The opinions referenced above are those of the author as of Sept. xx, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. The opinions are based on current market conditions and are subject to change. They may differ from those of other Invesco investment professionals.
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