Real estate investment trusts occupy a peculiar position in today’s investment landscape. On one hand, REITs were hammered by the 2022-2023 rate hiking cycle more severely than almost any other asset class — a natural outcome given that real estate is fundamentally a long-duration asset whose valuations move inversely with interest rates. On the other hand, the gradual beginning of the Fed’s rate-cutting cycle and the subsequent modest decline in long-term yields have created the conditions for a REIT recovery. But the story is not uniform: different property sectors are experiencing vastly different fundamental conditions, and separating winners from losers requires looking beneath the asset class surface.
The Rate Sensitivity Context
REITs fell approximately 25-30% from peak to trough during the 2022-2023 rate shock, significantly underperforming the S&P 500 even as equity markets broadly declined. The FTSE Nareit All Equity REITs Index has recovered approximately 18% from its trough, but remains approximately 12% below its early 2022 highs — meaning that REIT investors as a group have experienced a net loss of wealth relative to the starting point of the rate cycle, even after a partial recovery.
The partial recovery reflects the complex interplay of improved fundamentals in some sectors, the Fed’s rate cuts providing some relief on financing costs, and the still-elevated 10-year Treasury yield — which at 4.65% remains a meaningful competing alternative for income-oriented investors who might otherwise allocate to REITs. The REIT sector typically commands a yield premium over 10-year Treasuries; that premium has compressed in 2026, suggesting that relative to bonds, REITs have limited additional near-term upside unless Treasury yields decline further.
Office REITs: The Walking Wounded
Office REITs are in genuine structural distress, and the narrative around remote work deserves careful analysis to understand why. Office occupancy rates in major US cities, as tracked by Kastle Systems’ card swipe data, have stabilized at approximately 55-60% of pre-pandemic levels — well below the 80-90% that characterized pre-COVID office usage and below the levels at which most office landlords can service their debt and pay dividends without property value impairment.
The delinquency rate on commercial real estate office loans has risen to approximately 6.7%, according to the Mortgage Bankers Association — more than double the 3.0% rate of 2022 and approaching the levels seen during the 2008 financial crisis. Several marquee office properties have sold at enormous discounts to their pre-2020 valuations: One Market Plaza in San Francisco sold for approximately $350 million in 2024 against a 2019 valuation of $975 million. 1407 Broadway in New York transacted at a 70% discount to its prior appraised value.
Major office REITs including Vornado Realty Trust, SL Green, and Brookfield Property Partners have all taken significant impairment charges and reduced dividends. The sector is likely to remain under pressure for several years as lease expirations create opportunities for tenants to significantly reduce their footprints, and as the approximately $1.5 trillion in commercial real estate debt maturing by 2027 requires refinancing at substantially higher rates than the loans it replaces.
Industrial and Logistics: The E-Commerce Anchor
While office REITs struggle, industrial and logistics REITs have maintained strong fundamentals driven by e-commerce and supply chain reconfiguration. Prologis, the world’s largest logistics REIT with approximately 1.2 billion square feet of warehouse space globally, reported full-year 2025 funds from operations (FFO) per share growth of 8.7%. Occupancy rates across its portfolio stand at approximately 96.5%, and net effective rent growth — the increase in rental rates on new and renewed leases — was 50% on a cash basis for the full year.
The structural demand driver is the continued growth of e-commerce, which requires approximately three times the warehouse space of traditional retail for an equivalent volume of sales. Amazon, the largest user of logistics real estate, continues to expand its fulfillment network. The nearshoring of manufacturing capacity to Mexico and the southern US is creating demand for cross-border logistics facilities along the US-Mexico corridor that is driving rent growth in Texas, Arizona, and California markets.
Data Centers: The AI Demand Explosion
Data center REITs are the standout performers of the current cycle, riding the wave of AI infrastructure investment. Equinix, Digital Realty, and Iron Mountain have all delivered exceptional total returns as the buildout of AI data centers — which require extraordinary amounts of power, cooling capacity, and high-speed fiber connectivity — has created demand that has outstripped supply in every major market.
Equinix reported in its most recent earnings that colocation revenue grew 9.8% year-over-year, with an order backlog that represents the strongest demand environment in the company’s history. The constraint on data center growth is not demand but supply: power availability has become the binding constraint in key markets, with utilities unable to expand grid capacity as rapidly as hyperscaler customers require. This supply constraint supports continued rent growth and long lease terms that provide earnings visibility.
Healthcare REITs: The Demographics Play
Healthcare REITs — which own senior housing, medical office buildings, hospitals, and skilled nursing facilities — are benefiting from the same demographic tailwind that is straining Social Security and Medicare: an aging baby boomer cohort that is entering the years of peak healthcare utilization. Welltower and Ventas, the two largest healthcare REITs, have both reported accelerating occupancy recovery in senior housing assets as the pandemic-era disruption to senior care facilities is fully resolved and underlying demographic demand reasserts itself.
Senior housing occupancy has recovered to approximately 85% nationally, from a COVID-era trough near 74%, and is projected to reach 90%+ by 2028 as the volume of Americans entering their 80s — the primary age cohort for senior housing — accelerates through the late 2020s. This demographic demand is essentially inelastic and highly predictable, making healthcare REIT fundamentals among the most foreseeable in the real estate sector.
Residential REITs: Supply Pressure in Some Markets, Tightness in Others
Apartment REITs have navigated a period of elevated new supply — as construction starts that began during the 2021-2022 apartment building boom came online through 2024 and 2025 — followed by a projected decline in new deliveries that should tighten market conditions by late 2026 and into 2027. Markets like Austin and Phoenix, which saw the most intense apartment construction, have experienced meaningful rent deceleration and some rent concessions from landlords. Markets like the Northeast and parts of the West Coast, where zoning restrictions have limited new supply, have maintained stronger rent dynamics.
The mortgage rate lock-in effect discussed in other contexts is actually a tailwind for apartment REITs: the 15 million homeowners locked into 2.5-3% mortgages who cannot afford to move are effectively staying in apartments longer than they otherwise would, providing demand support that helps offset the new supply coming to market.
REIT Investor Strategy for 2026
The REIT opportunity set in 2026 requires meaningful sector discrimination rather than broad asset class exposure. Industrial, data center, and healthcare REITs offer the strongest fundamental cases based on demand dynamics and supply constraints. Residential REITs offer a mixed picture that depends heavily on specific market geography. Office REITs should be approached with extreme caution and likely avoided entirely for most investors. Retail REITs — those owning shopping malls and strip centers — present a bifurcated picture, with high-quality mall REITs performing reasonably while more challenged properties face ongoing pressure.
For income-oriented investors, REIT dividends averaging 3.5-4.5% in the stronger sectors provide meaningful yield that should grow modestly as fundamentals improve. The interest rate outlook — and specifically, whether the Fed can cut rates further without reigniting inflation — will ultimately determine whether the REIT sector’s multiple expansion potential is realized or remains constrained by the competing attractiveness of bond yields.
Sources: FTSE Nareit, Kastle Systems, Mortgage Bankers Association, Prologis financial reports, Equinix financial reports, Welltower financial reports, Ventas financial reports, Federal Reserve
