REITs Usually Underperform When Interest Rates Are Rising. Not This Year. Here's Why.

Real estate investment trusts (REITs) typically perform worse when interest rates are rising. In fact, there’s a rule of thumb many investors have used for this asset class: rates up, REITs down.

REITs typically own and manage properties, and they often rely heavily on borrowing to expand their portfolios, so higher interest rates can hit them harder than many other businesses. In addition, real estate values tend to rise when interest rates fall. And REITs are dividend stocks — they’re legally bound to distribute 90% of their taxable income to shareholders as dividends — so when interest income is harder to find in a low-interest rate environment, these stocks are more attractive to income investors.

That makes REITs an investment that does well when interest rates are low or falling.

That’s not the case this year, however, as the Federal Reserve has been talking about raising rates for months, and it finally did so in September. Futures markets are pricing in two to three more quarter-point hikes by the end of 2027. So, interest rates are clearly heading higher.

Yet REITs are doing reasonably well this year. They were the best-performing asset class in October, as measured by the Vanguard Real Estate Index Fund ETF (VNQ +3.18%), which climbed 4.8%. The exchange-traded fund (ETF) holds various types of REITs, including data centers, healthcare, industrial, and retail REITs, among others.

Several REITs are doing much better than the group as a whole. Welltower (WELL +2.83%) is a REIT that focuses on senior housing and healthcare properties, and it’s up 33% so far in 2026 (as of Nov. 3). Equinix (EQIX +3.91%), a large data center REIT, has climbed 28% this year. Iron Mountain (IRM +1.69%), which has a large portfolio of warehouses and storage units plus data centers, has soared 39% this year.

REITS and interest rates are less correlated this year

How are these REITs faring so well in an environment of rising interest rates?

Well, it turns out that REITs aren’t driven by interest rates alone. In fact, the correlation of REIT performance with low interest rates is weaker this year, according to research by investment firm Cohen & Steers. Instead, fundamentals such as cash flow growth, real estate supply-and-demand dynamics, and valuations are driving returns in 2026.

Many of the post-pandemic headwinds that REITs faced in the 2022-2024 period — businesses abandoning office space, high inflation and very tight financial conditions, stay-at-home work culture, and an imbalance between demand and new supply — have faded.

And the U.S. economy is healthy. Third-quarter gross domestic product (GDP) increased at a 3.4% annual pace, and the unemployment rate, at 4.2% in September, remains near historical lows. That means businesses need warehouses, office space, data centers, health facilities, and many of the other properties that REITs own and manage.

In addition, the fact that the Fed didn’t raise its target interest rate in October suggests to me that the Kevin Warsh-led Fed plans to go very slowly and deliberately on raising rates, taking the economy’s pulse methodically before each rate move.

Certain REIT categories are soaring in 2026

The best-performing REIT categories this year, through the first half, have been data centers, lodging and resorts, and healthcare. Residential REITs have lagged behind those sectors significantly, but I think that will change when the housing market eventually turns up.

REITs provide a steady stream of income to their shareholders. And when they’re also providing returns, they become doubly attractive. If the economy continues to thrive, demand for all kinds of real estate will continue to grow. And sector-specific trends, such as the aging of the U.S. population and the growth of data centers, will affect the performance of certain types of REITs. Overall, this asset class strikes me as very attractive right now.