Overview
Over the past decade, real estate investment trusts (REITs) have meaningfully lagged broader equity markets, both domestically and abroad.
Table 1: Real Estate vs Equity Performance – Last 10 Years
However, recent underperformance can be explained by unique negative drivers. The reasons to own real estate remain the diversification benefit and income generating characteristics.
Income vs Price Return
One of the most widely used benchmarks for publicly traded US real estate, the FTSE EPRA/NAREIT US Index, has tracked the performance of US REITs since its inception in 1996. Over this period real estate and equity performance have been similar, with real estate returning 9.1% compared to 9.9% for the S&P 500. However, different components drive the returns for these asset classes.
REITs are valued for their steady income, a feature embedded in their regulatory structure. To maintain their tax-advantaged status, REITs must distribute at least 90% of their taxable income to shareholders as dividends.[1] This requirement has historically made REITs attractive to income seeking investors and has provided a steady cash flow component to total returns. Real estate ownership can also offer protection in inflationary environments, since rents can be adjusted to reflect rising prices which helps preserve real income.
On the other hand, the S&P 500’s return has been largely driven by capital appreciation, or the increase in stock prices without considering dividend income. Unlike REITs, corporations are not required to pay dividends.
As expected, income returns have been stable and far less volatile than price returns for both asset classes since 1996. Real estate income, however, was substantially higher with more than half of its total returns coming from dividends compared to less than a quarter for equities.
Given this historical backdrop, it would be reasonable to assume that real estate’s underperformance over the past decade reflects weakening cash flows. However, this is not the case. Instead, the underperformance is driven by a prolonged period of flat price returns.
While income remained steady in REITs over the last 10 years, the price return of 1.0% compared to 12.2% in equity markets led to the divergence in total returns.
However, there were structural shocks that caused the price return to be so poor over this period which aren’t expected to be persistent long term.
Figure 5: Structural Shocks in Real Estate
The most pronounced impact on real estate valuations over the last 10 years was COVID. The rise in working from home decreased office and retail demand, leading to sharp price decreases in March of 2020, which is circled in Figure 3.
The other key driver to the stagnant price return was two periods of rising interest rates which compressed real estate valuations for multiple reasons.
Relative Income
When interest rates increase, income from bonds becomes more attractive than income from real estate on a relative basis. This shrinks the buyer pool and drives property values down due to a lack of demand. The lack of transactions also means there are fewer comparable properties which makes pricing buildings more challenging and leads to increased concessions for property owners trying to sell.[2]
Borrowing Costs
Rising interest rates make it more expensive to get a loan to buy or build commercial real estate. This decreases debt service coverage ratios because cash flows cover debt to a lesser extent which results in smaller loan-to-value (LTV) quotes. To compensate for the lack of debt in the capital stack, buyers are forced to either increase down payments or pay a lower price to obtain financing.
Cap Rates
When rates rise, investors demand a higher yield (cap rate) to compensate for the risk they are taking compared to a now elevated risk-free rate. Since cap rates are calculated by dividing net income by property value, in this situation, property values fall as cap rates rise given a fixed level of income.
Real interest rates (or rates that adjust for inflation) impact cap rates the most.[3]
As marked by the shaded areas in Figure 5, periods where treasury rate rose corresponded with real estate prices falling, but these extended periods of rising rates shouldn’t be expected long term since the current interest rate environment is more “normal” compared to the mid-2010s and post COVID when rates were historically low.
Moving forward, when considering REITs from a component of return perspective, real estate has a solid outlook because price returns are expected to be higher because of a lack of negative shocks while the income portion of returns has remained consistent through market cycles.
International Real Estate
Over the past decade, international REITs have materially underperformed both US REITs and broader global equities. While US REITs only returned 4.9% over the past 10 years, non-US REIT performance lagged even more, returning 2.0%. This underperformance is the result of a combination of structural differences, heightened sensitivity to interest rates, and currency effects for US-based investors.
Market Structure
A key driver of the underperformance of international REITs has been structural differences in both sector composition and underlying growth dynamics. Non-US real estate markets remain more heavily concentrated in traditional property types such as office, retail, and residential. These segments have faced persistent secular headwinds over the past decade, including e-commerce disruption and reduced office demand following the COVID pandemic.[4]
By contrast, US REIT indices have moved toward higher-growth sectors such as industrial/logistics, data centers, and cell towers. These segments have benefited from long-term tailwinds tied to digitalization, cloud computing, and supply chain reconfiguration. As a result, US REITs have delivered stronger earnings growth when compared to international REITs.
This structural gap is further amplified when comparing REITs to broader equities. Global equity returns over the last 10 years have been dominated by large-cap technology companies, which are not represented in real estate indices.
Heightened Interest Rate Sensitivity
Rising interest rates have had a more pronounced impact on international REITs than on US REITs, amplifying their relative underperformance. This is largely due to differences in financing structures, market liquidity, and income growth.
International REITs tend to rely more on shorter-duration and floating-rate debt, meaning borrowing costs reset more quickly as rates rise. This leads to faster deterioration in cash flows, lower allowable leverage, and more immediate downward pressure on property values. In contrast, US REITs have generally locked in longer-term, fixed-rate financing, slowing the transmission of higher rates.
At the same time, valuation adjustments have been sharper internationally. Less liquid transaction markets and fewer comparable sales during periods of rising rates increase uncertainty, often forcing more aggressive price declines.
Finally, weaker income growth in international markets provides less offset to rising cap rates. As a result, higher discount rates translate more directly into lower valuations, making international REITs structurally more sensitive to interest rate increases than their US counterparts.
Currency Impacts
For US-based investors, currency has been a significant and quantifiable drag on international REIT performance. Returns to foreign assets consist of both local market performance and movements in exchange rates relative to the US dollar. Over the 10-year period ending March 31, 2026, the US dollar appreciated against a broad basket of developed and emerging market currencies, creating a persistent headwind for unhedged investments.
When foreign currencies depreciate versus the dollar, the currency component becomes negative, reducing total returns in USD terms. The REIT return for the period in terms of local currency is estimated to be 3.1% based on a 1.1% exchange rate impact from the strengthening of the US dollar.[5]
Importantly, this currency effect is largely independent of underlying real estate fundamentals. A USD-hedged investor would have achieved returns much closer to local market performance, suggesting that a meaningful share of international REIT underperformance stems not from weaker property-level income, but from the sustained strength of the US dollar over the period.
Diversification Benefit
Historically, US REITs have had lower returns and higher volatility than equities. However, since real estate is not perfectly correlated with the broad equity market, including a REIT allocation would have improved risk adjusted returns over the past 30 years.
Table 2: Risk Adjusted Returns
While this number will vary based on the time period and indexes being examined, a 6% real estate allocation would optimize the risk-adjusted return based on the Sharpe ratio for a portfolio consisting of the S&P 500 and FTSE EPRA/NAREIT US Index since May 1996.
Furthermore, as the third largest asset class in the US Market trailing only stocks and bonds, the low correlation of REITs with domestic and global equity indexes has provided a larger diversification benefit that size, style, or non-US strategies.[6]
Conclusion
REIT underperformance in recent years stems from interest rates rising, pandemic disruptions, and outsized technology-led equity gains rather than structural flaws. Income resilience, improving valuations, and the potential for interest rate normalization position REITs for recovery. Both US and international markets present selective opportunities, and real estate continues to play a vital strategic role in diversified, income-oriented portfolios.
Disclaimer
This commentary is intended solely for informational and educational purposes and does not constitute legal, tax, investment, or accounting advice. It does not represent an offer to sell or a solicitation of an offer to buy any security, financial instrument, or investment interest. Any such offer or solicitation will be made only through formal offering documents and in accordance with applicable laws and regulations.
Certain statements contained herein may include forward-looking information, hypothetical illustrations, or projections. These are based on current assumptions and expectations, which are subject to change and involve known and unknown risks and uncertainties. Actual outcomes may differ materially due to factors such as financing availability, regulatory approvals, market volatility, force majeure events, competitive pressures, and other unforeseen circumstances.
No representation or warranty is made regarding the accuracy, completeness, or reliability of the information presented. Past performance is not indicative of future results.
This material may reference potential interest rate or market trends that are not guaranteed and may differ materially from actual results. The information herein should not be relied upon as a guarantee or forecast of future performance or interest rate movements.
This document is proprietary and may not be reproduced, distributed, or shared without prior written consent. By accepting this commentary, the recipient agrees to use it solely for its intended purpose.
Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Average annual total returns include reinvestment of dividends and capital gains.
Any indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. Investors cannot invest directly in an index. Comparisons to indexes have limitations because indexes have volatility and other material characteristics that may differ from a particular fund.
[1] U.S. Securities and Exchange Commission (SEC), Investor Bulletin: Real Estate Investment Trusts (REITs) [sec.gov]
[2] French (2020). Pricing to Market: Comparable Evidence in Property Valuation. [Pr. Nick French Report (296 KB).pdf]
[3] CFA Institute, The Interplay Between Cap Rates and Interest Rates [rpc.cfainstitute.org]
[4] Nareit, REIT Industry Data and Research. [reit.com]
[5] Source: FTSE, Xe. This is an estimate based on FX rates for the 10-year period ending May 1, 2026. The currency basket as of March 31, 2026 was used to estimate the currency basket composition for the entire period.
[6] Nareit, Monthly Index Values & Returns. [reit.com]
