The Rate Shock That Didn’t Break REITs–A Hoya Capital Real Estate Featured Insight

State Of REITs: Surviving Higher for Longer

In our State of REIT Nation report, we analyze the recently released NAREIT T-Tracker data. Earlier this month, we published our REIT Earnings Recap, which analyzed quarterly results on a company-by-company level. This report will focus on higher-level macro themes affecting the REIT sector at large.

The macroeconomic backdrop has taken another sharp turn in recent months – especially as it relates to ever-important benchmark interest rates – capped off last week by the Federal Reserve’s first rate increase since 2023. The 10-Year Treasury Yield ended the week at 5.00%, up 84 basis points since the start of the year, while the 2-Year Treasury Yield climbed to 4.75%, up 128 basis points. But perhaps the biggest surprise from the past quarter is what hasn’t happened: REITs haven’t gotten outright crushed. Despite those formidable rate headwinds, the Vanguard Real Estate ETF (VNQ) remains higher by about 7% in 2026, only modestly underperforming the S&P 500, which has gained 12.6%, and the Mid-Cap 400 has gained 11.2%. In years past, a hawkish Fed hike alongside a 10-Year Treasury above 5% would have been the recipe for disaster in the REIT space, but the relative resilience has increasingly become a theme in 2026. Despite the resilience, however, Equity REITs have lagged the S&P 500 by over 80 percentage points since the Fed’s initial rate hike in March 2022 – a mind-boggling sum for a sector that has historically produced similar annualized total returns.

There’s no sugarcoating it: higher rates suck for real estate investors. Debt becomes more expensive, cap rates face upward pressure, refinancing gets harder, dividend yields face more competition from fixed income, and external growth becomes more difficult to pencil. But we’re simply not seeing the violent public-market reaction to higher rates that defined much of 2022 through 2024. Enabling this resilience, REIT-rate correlations have eased considerably in recent quarters, a more favorable regime in which performance is increasingly driven by property fundamentals, corporate strategy, and capital allocation rather than macro forces alone. Charting the rolling 12-month correlation between Equity REITs and intermediate Treasury bonds, we note that the relationship approached a near one-for-one correlation through much of 2024 and 2025, a period in which every move higher in interest rates seemed to produce an almost mechanical decline in REIT valuations. That correlation has now fallen to its lowest level in roughly four years. Rates still matter, of course, but they’re no longer the only thing that matters.

During the worst of the REIT downturn, public REIT share prices repriced almost immediately to higher interest rates while private-market property values adjusted only gradually, producing unusually wide discounts to estimated NAV. That dynamic is beginning to reverse. Public REIT valuations have stabilized even as benchmark rates have moved higher, while private-market values remain well below their 2022 peaks and financing economics have become more challenging. In effect, the public-private valuation gap is narrowing, not because private real estate has staged a dramatic recovery, but because listed REITs have outperformed their private-market counterparts in recent quarters. REITs now trade at roughly NAV parity, an improvement from discounts that reached nearly 30% in 2023-2024 and roughly 15% as recently as 2025. That matters because NAV premiums and discounts help dictate the flow of capital between public and private real estate. When REITs trade at deep discounts, issuing equity is unattractive, capital shifts toward buybacks and asset sales, and private buyers can acquire public portfolios at compelling values. When REITs trade near NAV or at a premium, that flow can reverse. Public companies can issue equity efficiently and pull capital and properties back into the listed market. Closing the NAV discount therefore directly improves the external growth outlook for public REITs.

REITs are again being differentiated based on their ability to push rents, control expenses, allocate capital, strengthen balance sheets, raise dividends, and execute acquisitions. After several years in which much of the sector effectively sat on its hands waiting for lower rates, management teams have increasingly turned to a broader playbook that includes asset sales, buybacks, capital recycling, joint ventures, private-capital partnerships, portfolio simplification, and M&A. REITs have indeed been as active as ever on the M&A front, which we believe has been one of the most important catalysts in breaking the REIT-rate correlation. Earlier this month, Independence Realty (IRT) agreed to acquire Centerspace (CSR), extending a historically active wave of activity that has included the acquisition of 12 public REITs this year and 40 since the start of 2022. This M&A boom has done more than simply reduce the number of publicly listed REITs. It has provided tangible evidence that public-market discounts to private-market NAV are real and monetizable. Before this M&A boom, public REIT investors could reasonably question whether estimated NAV values were actually achievable when transaction markets were effectively frozen. The recent wave of acquisitions has increasingly provided real-world marks, often at valuations substantially above where the acquired REIT traded before strategic interest emerged

A second lever behind the recent resilience has been the surprisingly strong property-level performance, reinforcing that the lingering pockets of distress across commercial real estate remain primarily debt-driven rather than demand-driven. REIT same-store property-level Net Operating Income rose 4.1% year-over-year in the most recent quarter and now stands 21.7% above 2019 pre-pandemic levels. Manufactured Housing remains the cumulative leader, with NOI 49% above 2019 levels, followed by Industrial at 45%, Self-Storage at 41.4%, and Single-Family Rental at 40%. Healthcare has been the strongest major sector in current-year growth at 6.6%, followed by Manufactured Housing at 6.4%, Industrial at 5.1%, and Data Centers at 5.0%. Strip Centers reported 4.0% growth, while Office REIT NOI increased 2.8%. Even the lagging Office sector now reports same-store NOI 6.3% above pre-pandemic levels, highlighting the extent to which the sector’s problems have been driven by valuation resets, elevated capital expenditures, leasing costs, and financial leverage rather than a wholesale collapse in property revenues.

Supporting REIT fundamentals has been the sharp moderation in new supply growth across most property sectors. Higher interest rates, tighter construction lending, and elevated building costs have dramatically curtailed new development starts over the past several years, allowing existing landlords to benefit from a more favorable supply-demand backdrop even as economic growth has moderated. The REIT development pipeline provides a useful illustration of this trend. Excluding Data Centers, the current REIT development pipeline is down about 40% from its 2022 peak and approximately 40% below 2019 levels. While this dataset captures only development undertaken by publicly traded REITs, it is generally representative of the broader construction slowdown across commercial and residential real estate. Data Centers are essentially the lone major exception, with a development pipeline is seven times larger than in 2019, as AI and cloud-computing demand continues to collide with severe constraints on available electric power and entitled sites. Outside of Data Centers, however, there simply isn’t much new real estate being built. In that sense, the same elevated interest rates that have pressured REIT valuations and increased financing costs have also created a fundamental silver lining: higher rates are suppressing future supply, improving the medium-term competitive position.

A third lever has been dividend growth, which has become an increasingly important signal of confidence from REIT management teams. Dividend increases have again vastly outnumbered reductions in 2026, with the latest tally showing 67 REITs raising their distributions compared with eight cuts or reductions. The increases have also been broad-based, spanning Apartments, Single-Family Rentals, Manufactured Housing, Healthcare, Storage, Cell Towers, Shopping Centers, Malls, Net Lease, Hotels, Casinos, Billboards, Mortgage REITs, Cold Storage, and Industrial. Notable double-digit increases this year have come from Welltower (WELL), CareTrust (CTRE), American Homes (AMH), SBA Communications (SBAC), Equinix (EQIX), First Industrial (FR), Terreno (TRNO), and Chatham Lodging (CLDT). The strength in dividends is particularly notable considering the interest-rate environment. During the prior cycle, REITs were often forced to prioritize debt reduction and liquidity preservation over distribution growth. This time around, the combination of healthy property-level cash flows and conservative payout ratios has given management teams significantly more breathing room. Sector-wide dividend payout ratios fell to just 66.6% of FFO in Q2 compared with a 20-year average of roughly 78%. That spread represents a sizable pool of internally generated capital without relying on expensive external debt.

Where Are We In The Real Estate Cycle?

A framework often credited to British economist Fred Harrison, the 4-Phase Real Estate Cycle is comprised of 1) Recovery; 2) Expansion; 3) Hyper supply; and 4) Recession. As we’ll discuss in this report, trends over the past several quarters indicate that the real estate cycle transitioned from the “Recession” phase to the “Recovery” phase through early-to-mid 2026 – despite the interest rate fluctuations – with muted supply growth serving as a key “silver lining” to the brutal three-plus-year bear market. Construction spending data last week confirmed that spending retreated 5% in the second quarter, marking the fifth straight quarterly retreat – the longest such streak of declining private real estate development activity since 2010-2011. The decline came despite continued strength in data center, infrastructure, and manufacturing construction, which helped partially offset sharp slowdowns in commercial and residential development. Over the past two years, real construction spending on commercial properties (adjusted for the cost inflation) has seen its steepest decline since the Great Financial Crisis, pulling back roughly 5% y/y. Real spending on residential properties, meanwhile, dipped more than 12% in 2023 before recovering in 2024 before again turning negative in 2025 as mortgage rates remained stubbornly elevated. Combined, supply growth has effectively declined by 5% over the past 24 months, during which time Real Gross Domestic Product – which has a strong correlation with real estate demand – has increased by roughly 10%.

Consistent with the early stages of a Recovery phase, commercial property values have stabilized and gradually recovered following a substantial drawdown during the 2022-2024 period. Green Street Advisors’ Commercial Property Price Index shows that private-market commercial real estate values are higher by roughly 5% year-over-year through August and have recovered approximately 7.5% from their 2023 bottom. Even so, values remain 12.6% below the 2022 peak and are effectively unchanged from 2019 levels. The peak-to-trough decline in this index reached more than 20%, compared with approximately 30% during the Global Financial Crisis, and was sufficient to wipe out essentially all of the equity for highly leveraged investments originated near peak valuations. The headline index also masks enormous variation by property type. Senior Housing and Single-Family Rental values have essentially recovered toward prior peak levels, while Hotels, Strip Centers, Malls, and Casinos remain roughly 5% below 2022 levels. Industrial, Data Center, Cell Tower, and several other property categories remain approximately 10% below peak values. Net Lease and Skilled Nursing assets are around 15% below, Apartments and Self-Storage are approximately 20% below, while Medical Office and Ground Lease assets remain closer to 25% below peak. Office is the glaring outlier at roughly 40% below 2022 levels. The dispersion reinforces that there is no single “commercial real estate market.” Property fundamentals, capital requirements, financing structures, and long-term demand trends vary dramatically by sector.

A real estate portfolio is only as good as the balance sheet that finances it. And while public REITs may own the best house in the neighborhood with balance sheets that are the envy of the institutional real estate world, they are certainly not immune to the impacts of the lingering rate-driven distress around them. Trepp reported that the overall CMBS delinquency rate held near cycle highs at 7.85% in August, while the Special Servicing rate jumped 33 basis points to 11.42% – its highest level since February 2013. That said, while delinquency rates remain elevated, actual default rates remain relatively contained, reflecting a continued willingness by lenders to modify, extend, and restructure loans rather than force property sales in a still-illiquid transaction environment. Fitch’s latest data shows that default rates are around 3.6% – up from lows of around 1.75% in late 2022 – but still roughly in line with the 3.5% average in the three years preceding the pandemic (2017-2019). Office continues to drive much of the deterioration: the Office delinquency rate rose to 12.00%, while the Special Servicing rate climbed to 16.90%. Trepp noted that August transfers to Special Servicing nearly doubled from July and were concentrated in Office, with several large CBD loans reaching maturity after exhausting extension options. Four of the five largest newly delinquent loans were tied to office properties or portfolios in Chicago, Los Angeles, Washington, D.C., and Northern Virginia, reinforcing that today’s distress remains heavily centered on refinancing rather than an abrupt collapse in property cash flows.

Retail is increasingly worth monitoring after several years in which the sector largely faded from the CRE distress narrative. The Retail delinquency rate increased 24 basis points in August to 7.20%, up from 6.42% a year ago, while its Special Servicing rate climbed another 32 basis points to 13.60%, compared with 11.49% last year. Trepp attributed the latest increase primarily to newly delinquent regional malls and transfers of large mall and shopping-center loans, with maturity and refinancing pressure again the common thread. Multifamily, meanwhile, appears to be calming somewhat after a notable deterioration earlier in the cycle: its delinquency rate was unchanged in August at 7.69%, while the Special Servicing rate edged down to 8.37%, as new delinquencies were largely offset by cures. That said, multifamily delinquency remains well above the 6.86% rate from a year ago, so the sector isn’t entirely out of the woods. Industrial remains the clear standout on the other end of the spectrum, with delinquency of just 1.14% and Special Servicing of 1.27%, by far the lowest among the major property sectors. Lodging has also improved from earlier stress, with its Special Servicing rate of 8.74% now below the 9.10% level from a year ago.

Debt is becoming more expensive once again, and if long-term rates remain around these levels, we’d expect a modest reacceleration in loan distress. That risk is particularly pronounced among highly leveraged private-equity real estate strategies that underwrote investments around materially cheaper financing and relied on short-term bridge loans to fund acquisition and renovation strategies. The average public REIT term-to-maturity stands at approximately 69 months, or nearly six years, compared with around four years before the Global Financial Crisis and often closer to three years for private-market real estate loans. Higher rates will continue filtering into this figure as cheaper legacy debt matures, but solid NOI growth and conservative leverage have so far prevented a severe deterioration in coverage. This contrast is central to our thesis on the next stage of the cycle. Public REITs entered the tightening period with access to capital and, critically, time to act. Many private owners entered with much less of either. Multifamily has been the clearest example. Apartment demand and occupancy remain reasonably healthy, but a subset of smaller owners financed acquisitions at aggressive valuations with short-duration floating-rate debt on the assumption that rents would continue rising at double-digit rates and financing costs would eventually normalize. When neither occurred, the problem became financial rather than operational. Private-market distress can be very real without implying that public REITs face the same problem.

As rates remain elevated or even move higher, the relative advantage increasingly shifts toward the entity that isn’t forced to refinance, sell, or recapitalize. That’s increasingly where we see opportunity for public REITs to gain market share, buy assets at attractive bases, while benefiting from reduced development competition. Access to capital therefore remains critical. The average cost of existing REIT debt stands around 4.16%, while the cost of newly issued long-term debt has climbed to around 5.6%. The cost of equity, which we estimate using FFO yields, is roughly 5.95%. All three metrics have improved from their worst levels during the 2023 REIT selloff, but the most recent move in Treasury yields has again increased the hurdle rate on new investment. Importantly, however, higher market rates do not immediately reset the interest expense of the average public REIT. Existing borrowing costs remain around 4.2% because the sector overwhelmingly relies on long-term fixed-rate debt. Higher rates instead filter gradually into the income statement as older bonds mature and are refinanced at higher coupons. It’s certainly a headwind, but it’s a very different risk profile from a private owner whose floating-rate loan can reprice almost immediately or whose three-year bridge financing comes due all at once. Time is an underappreciated asset in real estate, and public REITs have considerably more of it.

Valuations: REITs Remain Cheap

Taking a further step back, it was truly a forgettable four-year period for real estate equities dating back to the start of the Fed’s rate-hiking cycle – a period that had seen historically low levels of “dynamism” across the sector, including the slowest three-year period ever for REIT capital raising activity (as a percent of market cap), the fewest number of REIT IPOs since the late-90s recession, and the first time ever in which the total number of publicly listed REITs declined for seven consecutive years. (1998 to 2003 saw six-straight years of declines) Today, there are 164 REITs in the FTSE Nareit All REITs Index – down from 222 at the start of 2021 and down from the peak of 225 in 2015. After increasing its weight in the S&P 500 in 17 of 20 years from 2000 to 2019, REITs’ sector weighting in the major equity benchmark declined for a fifth straight year in 2025 and stands at just 2.2% today. Further, per the recent BofA Fund Managers Survey, REITs continue to be among the most “unloved” asset classes across global markets, with net underweight positions in REITs hovering in the -10% to -25% range continuously for three years.

Valuations, rather than fundamentals, drove the vast majority of REIT underperformance throughout the real estate recession from 2022 through 2025. On a market-cap-weighted basis, REITs currently trade around 17x forward FFO, below the post-recession average of approximately 18.0x. On an equal-weight basis, however, REITs trade at just 14.3x, reflecting the significant valuation dispersion between the handful of Mega-Cap REITs and the broader Mid-Cap and Small-Cap universe. The setup is therefore arguably more interesting today than it was when Treasury yields were lower. The fundamental picture has improved, balance sheets remain healthy, M&A has provided validation of private-market values, and public REITs have become more active on offense. Yet valuations remain well below the broader equity market, particularly outside the Mega-Cap names. For the better part of four years, our view was that a durable REIT rebound ultimately required a meaningful normalization in long-term interest rates. The emerging evidence in 2026 suggests a potentially more nuanced path: public REITs may not need rates to fall significantly if they can simply demonstrate that earnings and balance sheets can withstand elevated rates while private-market peers increasingly struggle with the same environment.

Underperformance from real estate equities in a persistently elevated interest rate environment is not unwarranted, given that the two prior rate hike cycles that exceeded 400 basis points – the late 1980s cycle that sparked the Savings & Loan Crisis and the mid-2000s cycle that sparked the Great Financial Crisis – resulted in significant distress and disruption across the real estate industry. But the cumulative 80-percentage-point performance gap between REITs and the broader equity market in this three-year stretch is nevertheless remarkable, given the historical performance correlations: on a 15, 20, 25, and 30-year basis, REITs and the S&P 500 have delivered annualized total returns that are within about 4 percentage points. By comparison, the rolling relative performance spread (VNQ minus SPY) during the Great Financial Crisis peaked at around 20 percentage points in early 2009, and REITs closed the gap over the subsequent three years and ultimately climbed to fresh record highs by early 2022 – effectively the same time as the full rebound in SPY.

Consistent with the deeper discounts offered by smaller-cap REITs, we note that Equity REITs pay a dividend yield of 3.7% on a market-cap-weighted basis, but this dividend yield climbs to near 7% on an equal-weight basis and roughly 9.5% when including mortgage REITs. And while the average REIT now trades at roughly parity to its Net Asset Value, small-cap REITs trade at an estimated 16% discount to NAV, while micro-cap REITs trade with a NAV discount of nearly 25%. That said, for REITs, being “too cheap” can be a problem – especially in an elevated interest rate environment. Valuations are a reflection of these REITs’ cost of capital: highly valued REITs have access to cheap capital, while cheaper REITs must pay more to access capital. While modern equity REITs are more “dynamic” than a conventional bank, these “spreads” between cost of capital and return on capital are still critical. We continue to see a particularly compelling balance in the Mid-Cap portion of the universe, where valuations remain discounted but leverage is generally manageable and companies are large enough to enjoy scale efficiencies while still small enough for acquisitions and development to move the needle.

Deeper Dive Into REIT Fundamentals

After recording the largest year-over-year decline on record during the pandemic, sector-wide REIT occupancy has fully recovered and now sits near the upper end of its long-term historical range. Overall occupancy improved to approximately 93.8% in Q2, up around 80 basis points from a year earlier. For context, sector occupancy fell to 89.8% during the pandemic and dropped as low as 87.8% during the Global Financial Crisis, after which it took several years to recover back above 90%. The current level therefore looks remarkably healthy considering the magnitude of the interest-rate and valuation shock experienced over the past four years. Retail and Residential REITs remain the clear upside standouts on the occupancy front. Retail occupancy stands near a record-high 97.3%, supported by limited new construction and retailer demand that continues to surprise to the upside. Residential occupancy remains around 95.8%, essentially unchanged despite a historic wave of multifamily deliveries across Sunbelt markets. Industrial occupancy is approximately 93.5% following several years of normalization from the extraordinarily tight conditions of 2021 and 2022. Office remains the clear laggard at 88.0%, but occupancy has rebounded roughly 180 basis points year-over-year as leasing activity improves from the 2024-2025 lows. Importantly, that improvement has occurred even as private-market office distress remains intense, another illustration of the widening divergence between property operations and capital structures.

Company-level operating metrics have tracked the property-level rebound relatively closely. FFO per share rose 4.5% year-over-year in Q2 and now stands 14.5% above 2019 pre-pandemic levels. Same-store NOI grew 4.1% and is now 21.7% above 2019, while dividends per share increased 4.1% from last year and stand 6.7% above pre-pandemic levels. Aggregate sector FFO growth has been even stronger because acquisitions and portfolio growth supplement the per-share organic growth figures. The striking feature of these results is how ordinary the fundamentals look despite an extraordinarily difficult macroeconomic environment. REITs aren’t posting spectacular sector-wide growth, but neither are they exhibiting the broad earnings contraction that share-price performance from 2022 through 2024 might have implied. Our company-level earnings coverage reinforced this theme. Of the 98 Equity REITs that provided full-year FFO guidance in the latest earnings season, 58 raised their outlook, 36 maintained guidance, and just four lowered it. Hotel, Senior Housing, Data Center, Billboard, Cold Storage, Industrial, Retail, Office, and selected Net Lease REITs were among the notable upside standouts. Apartments and Self-Storage remained comparatively softer amid elevated new supply and slower rent growth, but even in those sectors the earnings picture generally remained stable rather than recessionary.

Powered by continued FFO growth and a measured pace of dividend increases, sector-wide payout ratios have become unusually conservative. The REIT dividend payout ratio fell to just 66.6% of FFO in Q2, dramatically below the 20-year average of approximately 78%. Payout ratios haven’t merely avoided deterioration through this rate cycle. They have actually improved relative to much of the pre-pandemic period as FFO growth has generally outpaced dividend growth. This stands in sharp contrast to the Global Financial Crisis, when collapsing cash flows and highly leveraged balance sheets forced widespread dividend reductions and emergency equity issuance. That retained cash flow has important implications beyond dividend safety. A REIT paying out roughly two-thirds of its recurring cash flow retains about one-third internally, providing a significant source of equity capital without issuing a single new share. These internally generated funds can finance redevelopment, fund portions of acquisitions, retire debt, repurchase discounted shares, or support future dividend growth. The benefit becomes particularly important when external equity is expensive. REIT investors understandably focus heavily on distribution yields, but the capacity to retain and redeploy cash at attractive returns can be just as important to long-term total returns.

Deeper Dive: REIT Valuations & Growth

While REIT valuations remain historically low relative to the broader equity market, green shoots have become increasingly visible across the capital markets. REIT IPO and listing activity has improved after a multi-year lull, with three public listings thus far in 2026. Janus Living (JAN), the Senior Housing spin-off from Healthpeak Properties (DOC), raised approximately $840M, while National Healthcare Properties (NHP) raised roughly $460M and Blackstone Digital Infrastructure (BXDC) raised approximately $1.8B. The pace remains modest compared with previous cycles, but the reopening is meaningful after several years in which the public REIT market was effectively closed to new issuers. The public listing market has historically played an important role in real estate capital formation. The modern REIT era was effectively born from the Savings & Loan Crisis in the early 1990s, when private real estate owners needed access to public equity capital to recapitalize overleveraged portfolios. Another wave of listings followed the tax-code changes of the mid-2000s and the post-GFC recovery. We aren’t suggesting another IPO boom is imminent, but the current environment creates some of the same ingredients. Private funds face looming maturities, redemption requests, and limited exit liquidity, while public REITs offer permanent capital, daily liquidity, and access to unsecured debt and equity markets. If private-market financing conditions remain difficult, public listings and REIT-sponsored transactions could become increasingly attractive alternatives.

REITs largely “hunkered down” over the past several years as public market valuations remained depressed relative to both historical norms and private market-implied property values, limiting the attractiveness of issuing equity to fund external growth. As a result, many REITs focused on balance sheet preservation, asset recycling, and internal growth while waiting for capital market conditions to improve. Activity has begun to rebound from the 2022 lows, but remains well below the 2019-2021 pace as REITs continue to wait out the Fed tightening cycle. REITs raised roughly $45B during the first half of 2026, approximately 4% above the comparable prior-year period, with debt representing the largest component. For comparison, annual capital raising exceeded $100B in several years between 2019 and 2021 and reached approximately $136B at the 2021 peak. Activity therefore remains roughly 50% below those levels, reflecting both elevated financing costs and management teams’ reluctance to issue common stock at discounted valuations. The composition is arguably more important than the headline total. REITs aren’t being forced to raise equity simply to survive. Much of the recent activity has instead been opportunistic, including unsecured bonds used to term out maturities, ATM issuance by premium-valued companies funding accretive external growth, and common equity issued around acquisitions. This is a critical distinction from the GFC. Capital markets may be expensive, but they remain open to most investment-grade public REITs. In a market where capital availability itself increasingly carries value, simply having the option to issue debt or equity can create a meaningful competitive advantage.

Distress for some is an opportunity for others, and public REITs have begun putting that balance-sheet firepower to work. REITs completed approximately $29.6B of acquisitions during Q2 against $10.9B of dispositions, resulting in $18.7B of net purchases. On a trailing twelve-month basis, acquisitions climbed to roughly $98.6B compared with $65.0B of dispositions, producing approximately $32B of net acquisitions. That’s a significant acceleration from the near-standstill transaction environment that prevailed from mid-2023 through mid-2024, when public and private property values remained too far apart for meaningful price discovery. Acquisitions have historically been one of the most important sources of REIT FFO/share growth, complementing organic same-store rent growth and development. The challenge since 2022 has been that public REIT cost of capital rose faster than private-market cap rates, making acquisitions difficult to finance accretively. That equation is gradually improving. Public REIT valuations have stabilized, private-market sellers have become more realistic, and some leveraged owners can no longer indefinitely extend maturities or defer dispositions. If rates remain elevated, we’d expect the pressure on private-market pricing to intensify, potentially opening a wider acquisition window for public REITs with balance-sheet capacity.

At the property-sector level, the distribution of activity is revealing. Healthcare REITs have been by far the most active gross buyers, completing more than $33B of acquisitions on a trailing twelve-month basis. Net Lease REITs have recorded approximately $8.6B of net purchases, Data Centers around $4.2B, and Strip Centers approximately $2.3B. Casino, Storage, and Industrial REITs have also been net buyers. These sectors generally combine favorable demand trends with either comparatively strong public valuations or substantial access to external capital, giving them the ability to play offense. Apartments and Office, meanwhile, have been the largest net sellers. Office REITs sold more than $10B of properties on a trailing twelve-month basis against roughly $6B of acquisitions, producing approximately $4.1B of net dispositions. Apartment REITs have also been active capital recyclers, selling roughly $4.8B against approximately $2.4B of acquisitions. In both cases, dispositions have often been less about abandoning the sector and more about portfolio refinement and capital allocation. Office REITs are shedding non-core or lower-quality properties and concentrating capital into premier assets, while Apartment REITs have taken advantage of continued private-market demand to dispose of mature assets and redeploy proceeds into development, buybacks, or higher-growth markets.

Deeper Dive: REIT Balance Sheets

The ability to avoid “forced” capital raising events has been the cornerstone of REIT balance sheet management since the GFC – a time in which many REITs were forced to raise equity through secondary offerings at “firesale” valuations just to keep the lights on, resulting in substantial shareholder dilution, which ultimately led to a “lost decade” for REITs. While REITs entered the tightening period in 2022 on very solid footing with deeper access to capital, the same can’t necessarily be said about many private market players that rely on short-term borrowing or continuous equity inflows to keep the wheels spinning. This cycle has been dramatically different. Public REIT equity issuance has remained around 1%-2% of aggregate market capitalization throughout most of the post-pandemic tightening cycle. Despite the fastest increase in interest rates in decades, a period of declining property values, and a historic period of relative share-price underperformance, the sector has not been forced into widespread emergency recapitalizations. That’s perhaps the clearest evidence that the post-GFC emphasis on conservative balance sheets wasn’t wasted. Public REIT management teams spent much of the 2010s “preparing for winter,” often to the frustration of investors attracted to higher-leveraged private alternatives. Winter eventually arrived, and the value of that conservatism has become increasingly apparent.

With the scars of the Financial Crisis still visible, most public REITs also fundamentally transformed how they borrow. More than 90% of public REIT debt is fixed-rate, compared with roughly half of private real estate debt, and an increasingly large share consists of unsecured corporate bonds rather than individual property mortgages. Fixed-rate debt now accounts for approximately 92% of total REIT borrowing, while unsecured debt represents more than 80%. These financing structures provide REITs with flexibility to sell properties without negotiating individual mortgage releases and dramatically reduce the immediate earnings sensitivity to changes in benchmark rates. This advantage hardly mattered when capital was cheap and plentiful. During the zero-rate world of the 2010s, private owners could borrow at floating rates with minimal penalty, refinance maturing loans with relative ease, and often employ substantially more leverage than public REITs without suffering an obvious disadvantage. That strategy worked exceptionally well until financing costs doubled or tripled. For private borrowers with substantial floating-rate exposure, the Fed’s tightening cycle flowed through to interest expense almost immediately. Public REITs, by contrast, have been able to gradually absorb higher rates as long-duration fixed-rate bonds mature.

Even after benchmark interest rates more than doubled from their pre-tightening levels, public REIT balance sheets remain healthy by historical standards. EBITDA interest coverage improved to 4.73x in Q2 from 4.61x previously, while debt as a percentage of enterprise value declined to 34.4% from 35.1%. Coverage ratios are below the exceptional pandemic-era peaks above 6x but remain substantially above the 2.5x-3x levels common before the GFC. Debt ratios have similarly ticked higher from the lows reached when REIT valuations peaked in 2021, but remain dramatically below the leverage employed by many private-market real estate strategies. The comparison with private real estate is necessarily imperfect because leverage reporting differs by strategy and property type, but 60%-80% loan-to-value structures remain common across more aggressive private-market portfolios. Again, this does not mean public REITs are immune from private-market distress. Falling transaction values affect public NAV estimates, struggling competitors can pressure rents or occupancy, and tighter credit spreads eventually increase refinancing costs for everyone. The difference is that most public REITs have enough equity to absorb these shocks without being forced sellers.

Takeaway: REITs Surviving Higher For Longer There’s no sugarcoating it: higher rates remain a clear headwind for real estate. The Fed is hiking again, the 10-Year Treasury is around 5%, refinancing costs are rising, and private-market distress remains elevated. But the defining change in 2026 is that public REITs are no longer breaking alongside every move higher in rates. Fundamentals remain healthy, dividend coverage is strong, and balance sheets remain far better positioned than those of many private-market peers. Just as importantly, public valuations are finally holding up. REITs have moved from deep NAV discounts toward parity even as private-market values remain below prior peaks, reversing the 2022-2024 dynamic in which public markets repriced first and hardest. Higher rates are also creating an important supply-side offset. Outside of Data Centers, development pipelines have contracted sharply as expensive financing and tighter lending standards suppress new construction, reducing future competition and supporting occupancy, rent growth, and same-store NOI as existing supply is absorbed. At the same time, NAV convergence can redirect capital back toward the public markets, where stronger valuations improve the ability of REITs to issue equity and acquire assets accretively. Higher-for-longer still creates pain, but it is increasingly creating opportunity for public REITs with the balance sheets, liquidity, and capital access to withstand the pressure. The key caveat is that this virtuous cycle depends on public-market valuations continuing to hold up: if NAV discounts widen materially again, the cost-of-capital advantage can quickly disappear and once again constrain external growth.