Will REITs be a Smart Investment in 2026?

Core Viewpoint - The real estate investment trust (REIT) sector is experiencing a downturn in 2025, but there is potential for recovery in 2026 as interest rates are expected to decline, which could enhance REIT valuations and make them attractive investments [1][13]. Group 1: Current Performance and Challenges - The S&P U.S. REIT Index has declined by nearly 5% year-to-date in 2025, continuing a trend of lackluster performance in recent years [1]. - Higher interest rates negatively impact property values and increase borrowing costs, making REITs less attractive compared to fixed-income securities [3][6]. - The correlation between interest rates and REIT returns shows that REIT share prices rose sharply in 2021 when rates were near zero, but declined in 2022 and remained low through much of 2024 as rates surged [6][4]. Group 2: Future Outlook for Interest Rates - The Federal Reserve has recently lowered its target rate by 0.25% to a range of 3.5%-3.75%, with expectations for further cuts in the coming year [6][7]. - Investors anticipate at least two more rate cuts, and there is political pressure for rates to drop below 1% next year, which could lead to a new Fed Chair more amenable to additional cuts [7]. Group 3: Potential Beneficiaries of Lower Rates - REITs with higher-yielding dividends are expected to benefit the most from falling interest rates, potentially leading to higher total returns for investors [8]. - The average dividend yield across the REIT sector is around 4%, while many net lease REITs have yields above 5.5%, indicating a strong position for these investments [9]. - VICI Properties, a REIT focused on casinos, currently yields 6.3% and has a strong growth rate in dividends, positioning it well for expansion if rates decline [10]. - Realty Income, yielding 5.6%, has diversified its investments and continues to increase its dividends, which could accelerate with lower rates [12]. Group 4: Investment Considerations for 2026 - REITs have historically been strong long-term investments, and a significant reduction in interest rates could revitalize the sector, particularly for those with higher yields like VICI Properties and Realty Income [13].