A back-to-basics REITs story: durable fundamentals and stock selection drives returns
In 2025, equity markets were captivated with the AI phenomenon, with relatively few stocks pushing equity markets to new records. By comparison, positive returns from listed REITs are easy to overlook.
Year-to-date returns across the REIT market varied remarkably, with large gains from non-U.S. REITs and U.S. healthcare REITs, while U.S. residential and data center sectors were notable laggards. As is often the case, fundamentals and valuations matter in driving returns. We believe that will be true again in the year ahead, and investors should be selective with stock picking and allocations to markets and sectors. At Principal, we highlight the U.S. senior housing sector as looking particularly attractive today.
Looking ahead, we see a favorable path for listed REITs if inflation remains in check, allowing the Fed to focus on the employment side of their mandate and provide rate cuts as needed to lift the economy. A growing economy, contained inflation, and stable or moderating interest rates is a positive backdrop that leads to steady price appreciation for REITs, driven by income growth and capital inflows. Importantly, new supply trends are favorable, capital markets for real estate are wide open, and transaction activity is picking up – all three are tailwinds for property values.
We expect in the year ahead that the durable fundamentals of REITs and low correlations with the Mag 7 stocks may prove attractive to investors seeking diversification away from AI risks in their portfolios. For many private real estate investors, listed REITs hold appeal given attractive relative value, liquidity, and significant exposure to alternative sectors that are essential in today’s economy and society.
Potential risks worth noting would be if stagflation emerges or an economic recession. However, we believe REITs are likely outperformers in a down market under a recession scenario.
Read our full report in our REIT market perspectives December 2025 edition.
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Investing involves risk, including possible loss of principal. Real estate investment options are subject to some risks inherent in real estate and real estate investment trusts (REITs), such as risks associated with general and local economic conditions. Investing in REITs involves special risks, including interest rate fluctuation, credit risks, and liquidity risks, including interest conditions on real estate values and occupancy rates.
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