MARKET UPDATE - The End (Of The REIT Bear Market) Is Near!
We love REITs, and we are not ashamed or embarrassed by that.
As we have pitched REITs as great long-term investment opportunities, we have received a good amount of criticism. Some investors think that REITs will never rally again because interest rates rose in 2022-2023. Some say that we've entered a new era of permanently higher inflation that will prevent rates from falling and hold back the performance of REITs. Others say there's no point in owning REITs because money market funds pay yields over 4% (for now).
We have a very different view.
We think the end of the REIT bear market is near. In fact, it may already be upon us. The Fed has begun a new rate-cutting cycle, long-term interest rates are falling, and (outside of one-time price increases due to tariffs) disinflationary forces are still exerting downward pressure on inflation over time.
Assuming the US economy remains out of a severe recession, the above sounds to us like the formula for a new REIT bull market.
Since the beginning of 2022, real estate (XLRE) has been the worst-performing sector of the stock market, while the energy (XLE) and tech (XLK) sectors have been the biggest winners:
We think that over the next 2-3 years, it should become one of the best-performing sectors of the market.
In what follows, we explain why.
Real Estate Is Poised For A Comeback
Would it surprise you to learn that from 1996 through 2021, the real estate sector (VGSIX) outperformed the S&P 500 (SPY)?
Well, it did.
As you can see below, it was only during the Dot Com bubble of the late 1990s and the AI-driven market from 2023 to the present that real estate hasn't outperformed the market.
Since launching in 1996, VGSIX has spent most of its time outperforming the S&P 500. What changed starting in 2022? Three things:
The rapid increase in interest rates (following an inflationary spike) caused rate-sensitive REITs to sell off and enter a prolonged bear market.
The ultra-low interest rate environment of 2020-2021, combined with unprecedented levels of fiscal stimulus, resulted in a huge but one-time burst in the development of new commercial property space.
The extremely tech-heavy S&P 500 has rallied strongly in recent years based on AI-related earnings growth and significant multiple expansion in Big Tech.
The first appears to be on the verge of at least partially reversing, the second is a headwind that is now mostly behind us, while the third (Big Tech winning from AI) appears to be largely priced in already.
If Big Tech's truly astounding growth is mostly priced in already, then it probably won't enjoy the same degree of multiple expansion-fueled outperformance over the next few years that it has over the last few years.
We have heard the argument before that the only reason that REITs performed so well from the 1990s through 2021 was falling interest rates, which in turn facilitated lower property cap rates (net operating income yields) and thus higher property values.
We don't deny that lower interest rates played a role in this strong REIT performance, but rates are far from the only reason why REITs performed so well. Supply and demand played a major role as well.
Consider home prices. Did home prices rise over this time merely because of lower mortgage rates? No, they also rose because (outside of the housing bubble of the mid-2000s) demand exceeded supply.
That is especially true of the highest quality, Class A real estate that REITs tend to own.
Yes, REITs benefit from falling interest rates. So do most other stocks. But the fundamental reason for REIT outperformance until recent years was the fact that demand exceeded supply.
As the post-pandemic burst of new supply gets absorbed, that headwind is now fading.
So, over the next few years, the real estate sector will enjoy multiple tailwinds that should result in strong performance:
Interest rates are declining
Growth of new supply is falling even as demand remains steady
To be fair, though, these points primarily apply to REIT fundamentals. REIT valuations and share prices, on the other hand, admittedly tend to correlate with corporate bonds over the short run.
Notice below the fairly high correlation between REITs (VNQ) and investment-grade corporate bonds (LQD):
All else being equal, REITs collectively (as a sector) tend to trade like corporate bonds but with more volatility, both to the upside and the downside.
While it can be frustrating that REITs often trade with greater correlation to corporate bonds than to their own fundamentals, the good news is that corporate bond yields are now declining.
We think US corporate bond yields are headed back to a range similar to that of the 2010s, between around 3.25% and 4.75%. Given the underlying macro environment of low GDP growth and low inflation, we think the elevated interest rates of 2022 through 2024 are the anomaly, not the 2010s period.
If that is correct, then even after their sharp drop recently, US corporate bond yields are still higher than the range to which they are returning.
That, in turn, means that REITs should enjoy more upside as corporate bond yields settle back into a lower range.
There is one more significant tailwind yet to mention, and that is the sheer amount of money currently warehoused in money market funds. That number now tops $7.3 trillion (with a "T").
(It is interesting to observe the drops in MMF assets every year around April 15th — tax day in the US!)
Compare the $7.3 trillion in MMF assets to the total market cap of US equity REITs of about $1.4 trillion, as of August 2025 (according to NAREIT).
Why does this matter?
Because in past Fed rate-cutting cycles, as the yield on MMFs falls to a sufficient degree, there is a gradual process of fund flows being diverted into other income-generating assets (such as REITs) in order to maximize income.
In today's environment of aging demographics, we think America's many retirees will surely reallocate some of their money from MMFs into REITs, which will turn the REIT headwind of the past several years into a new tailwind again.
The market is currently betting that a year from now, in September 2026, the Fed Funds Rate will most likely be somewhere in the range of 2.5% to 3.5% — 100 to 200 basis points lower than today.
Now, we don't believe that at a 3% yield, Americans will pull all their money out of MMFs to reinvest into REITs.
But after years of earning 4-5%+ on their MMFs, we do think many Americans will channel some of the money that would have previously gone into MMFs into higher yielding assets like REITs.
Over the last several years, we have heard countless times: "Why would I buy a REIT when I could own a MMF for the same or higher yield?" Well, what do those same investors do when REITs yield much more than their MMFs?
Bottom Line
Recency bias is a real thing, and even smart investors succumb to it.
The last three and a half years have been brutal for REITs. The period has lasted so long that many investors have thrown in the towel, assuming that REITs will never again return to strong performance.
We disagree. We think the post-pandemic period of high inflation and rising interest rates was a one-time macroeconomic anomaly that is highly unlikely to repeat. Massive money creation, pandemic-related supply chain breakdowns, and a development boom fueled by ultra-low interest rates and fiscal stimulus resulted in strong but temporary headwinds to REITs.
Those headwinds are subsiding, and tailwinds are rising to take their place. Inflation is dying down, interest rates are falling, and new supply of real estate space is collapsing.
The REIT bear market is over. A new REIT bull market appears to have begun.
In fact, REITs are already up nearly 40% since late 2023 when the Fed first began cutting interest rates. The latest rate cut has only sent REITs higher:
We just think that this rally will continue as interest rates are cut further and rent growth accelerates in most sectors.
Even following this early rally, many high-quality REITs remain a bargain. Here are just three examples:
EastGroup Properties (EGP) — A multi-tenant, last-mile industrial landlord/developer focused on the fast-growing Sunbelt region
Kite Realty Group (KRG) — A largely grocery-anchored shopping center REIT also largely concentrated in the Sunbelt
Alexandria Real Estate Equities (ARE) — The nation's premier life science landlord/developer, concentrated in America's top research hubs, typically adjacent to top research universities
All three of these REITs remain significantly cheaper than their peak valuations of early 2022 and are still hovering near their lows from the last few years.
We think the new REIT bull market has already begun, but there are still fantastic opportunities in this space for long-term total return investors and income investors alike.
Therefore, we will continue to accumulate more shares gradually, week after week, expecting more gains in the coming years.
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Analyst's Disclosure: I/we have a beneficial long position in the shares of all companies held in the CORE PORTFOLIO, RETIREMENT PORTFOLIO, and INTERNATIONAL PORTFOLIO either through stock ownership, options, or other derivatives. We also own a position in FarmTogether. High Yield Landlord® ('HYL') is managed by Leonberg Research, a subsidiary of Leonberg Capital. All rights are reserved. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. The newsletter is impersonal and subscribers/readers should not make any investment decision without conducting their own due diligence, and consulting their financial advisor about their specific situation. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. We are a team of five analysts, each contributing distinct perspectives. Nonetheless, Jussi Askola, the leader of the service, is responsible for making the final investment decisions and overseeing the portfolio. We do not always agree with each other, and an investment by Jussi should not be taken as an endorsement by other authors. Past performance is no guarantee of future results. Our portfolio performance data is provided by Interactive Brokers and believed to be accurate but its accuracy has not been audited and cannot be guaranteed. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated and may at times use margin and/or invest in companies that are not typically included in REIT indexes. Finally, High Yield Landlord is not a licensed securities dealer, broker, US investment adviser, or investment bank. We simply share research on the REIT sector.
