REITs have outperformed the broader equities market during the first half of this year, yet performance across property sectors and individual companies is more mixed, with clear leaders and laggards. Broadly, the real estate sector is navigating cyclical and secular shifts, as well as general uncertainty, inflationary pressure, and rapid advances in AI.
REIT.com recently spoke with Todd Kellenberger, director, REIT portfolio specialist at Principal Asset Management; Sam Wald, co-manager of Fidelity’s Stock Selector Mid Cap Fund (FSSMX); and Matthew Werner, managing director, REIT Strategies at Chilton Capital Management, for their views on the opportunities and challenges ahead for REITs.
From a high-level perspective, how do you see macro fundamentals shaping up for REITs in the second half of 2026?
Todd Kellenberger: REITs enjoy tailwinds from low supply in many markets and secular demand drivers in alternative sectors, such as senior housing and data centers. Many REITs will also benefit from positive mark-to-market on leasing activity. This will help drive earnings growth even if macroeconomic conditions wobble.
Also, real estate capital markets are open and well-functioning for the REIT market, which should support growth initiatives such as new development, redevelopment, and acquisitions. Taken together, these factors support a favorable real estate market backdrop for REITs for the remainder of the year.
Sam Wald: For most property types, supply remains low, setting the backdrop for multiple years of positive fundamentals, absent a demand shock. According to Dodge Construction Network, aggregate construction starts are 1.6% of existing stock. This is one of lowest levels in history outside of recessions, and below the long-term average of about 2%. At the same time, demand has been better than expected. Real GDP growth remains healthy at 2%-plus, driving strong demand across multiple subsectors.
Matthew Werner: With construction costs still on the rise and the economy proving to be resilient, including job growth and retail sales, the supply and demand fundamentals will continue to get better. Unless the economy takes a sharp turn to the negative, we believe the next two years will be a goldilocks scenario for most property types. Supply could start becoming an issue at some point, but we are several years away from any oversupply risks.
However, high oil prices due to the war in Iran have taken potential rate cuts off the table and have even changed the consensus for the next move by the Federal Reserve to be a rate hike. Given that the dividend yield of the REIT benchmark is below the 10-year Treasury yield, we believe the biggest risk is a downward move in multiples to re-rate to a higher 10-year Treasury yield. Earnings growth, however, could counteract some of the change in multiples.
Which property sectors are you most enthusiastic about in the near term, and what metrics are you watching most closely?
Kellenberger: We continue to see an attractive growth runway and strong fundamentals for senior housing and data centers. Both are structural growth stories. For senior housing, it’s about demographics and an aging population meeting a relatively low supply environment. There is also an external growth story of consolidation in the industry, as large REIT platforms with a low cost of capital can aggressively grow via acquisitions.
The data center sector is benefiting from a significant capital expenditure cycle driven by AI. However, we see the best opportunities in the sector as durable, long-term growth stories that extend beyond AI. Colocation and network-dense facilities in top tier markets will always be in demand, and AI is only accelerating an already strong growth story.
Wald: With the current supply and demand backdrop, the setup for most property types is encouraging. Health care growth should remain robust due to limited supply and accelerating demand from demographics. The first baby boomers are turning 80 in 2026 and according to NIC MAP, the average move-in age for senior housing is the early 80s. NIC MAP expects growth in the 80-plus population from 2025 to 2030 of over 22% and over 55% growth by 2035.
Werner: Our largest overweights are health care, data centers, and shopping centers. Given these have been some of the top performing property types over the past few years, we are watching valuations closely. For health care, we are specifically looking at margins in senior housing to see if management projections for increasing margins at record high occupancy levels will come true.
For data centers, we are monitoring development leasing to determine how much value to ascribe to record high development pipelines that could be delivering for five-plus years. Finally, in shopping centers we are looking for capex to decline as tenant retention increases, which would bring upside to future AFFO estimates.
Where do you see the biggest mispricings, and do you anticipate making changes in your portfolio to take advantage of them?
Kellenberger: Office REITs continue to trade at substantial discounts, despite our view that many of the sector's long-term challenges are already reflected in current valuations. While concerns around office utilization and potential AI impacts on white collar employment remain, we believe investors should be selective and focus on companies with strong leasing activity, high-quality or newer assets, and prime market locations.
Wald: The market seems to be very focused on the short term at the moment, worrying only about the next quarterly report or the next data point. We feel this creates an opportunity to focus on stocks with medium to longer term positive fundamentals that may be going through a tough period in the short term. Sectors that meet those criteria include the self storage and tower sectors.
Werner: One sector that could re-rate higher is office, another overweight in the portfolio. Despite being the top-performing sector in the second quarter, it has the most room for upside given improving fundamentals and an inexpensive valuation relative to other property types. Cell towers are another interesting one, as they are trading at trough multiples on trough earnings. We have been adding to the sector in weakness, though we could be a year away from some good news.
How are you feeling about REIT balance sheet fundamentals?
Kellenberger: Overall, very good. Although financing rates are higher now than five years ago, which may slightly reduce earnings as debt refinances at these increased rates, this isn’t a new concern and is well-managed. Most REITs use conservative leverage levels and stagger their debt maturities effectively. Capital markets for REITs remain accessible and abundant, providing ample opportunities to manage their balance sheets.
Wald: REIT balance sheets generally remain in very strong shape, with average net debt to EBITDA in the mid-4x’s. REIT debt is also more unsecured and fixed rate than it has been historically, with unsecured debt at 80%-plus of total debt and floating rate debt in the low double-digit percent of total debt. We are also focusing on companies whose balance sheets have capacity to enable accretive external growth where the market may not anticipate such growth.
Werner: REIT balance sheets are in excellent shape. Net debt/EBITDA levels are the lowest on record, which is helping to offset higher interest rates. In addition, public REITs are able to issue unsecured debt below secured debt in most cases, giving public REITs a cost of capital advantage. The only negative is that the weighted average maturity of debt is declining as REITs are issuing more five-year debt given higher long term rates. This is likely a smart move, but it is something we are watching.
What major structural shifts do you see meaningfully impacting REIT performance in the near term?
Werner: Regulatory risks are probably the most top of mind. The rhetoric around housing has proven to be bipartisan and could potentially hamper landlords’ ability to push rent in certain markets. In addition, opposition to data center construction continues to grow, which is why we are reticent to apply meaningful value creation from data center development that is not shovel-ready. However, a potential unwind of the AI trade is the only near-term risk I can think of for data centers, though it is more of a headline risk than a risk to near-term earnings.
Wald: Some of the current demographics we are watching include the growing number of baby boomers (benefitting senior housing) and the shift in population to Sun Belt markets (benefiting some apartment, office, or retail owners). Legislative variables we are paying close attention to include governments’ attempts to increase home ownership, which may negatively impact single family rental owners, or control rents, which may negatively impact apartments.
Meanwhile, AI is driving massive demand in the data center space. AI is also impacting property management and allowing various sectors to better target customers and reduce costs. The next several years should be interesting.
Kellenberger: Two key structural drivers for REITs are growing digital infrastructure demand and an aging population. While we are monitoring power availability, development activity, affordability, labor costs, and operating performance, we believe both data center and health care REITs continue to have compelling near- and medium-term growth drivers.