REITs fall behind broader market in Q3 as interest rate concerns loom

Public real estate investment stocks reverted in the third quarter, giving up their lead over the broader market as rising interest rates appeared to have spooked investors.

In the third quarter, equity REITs saw their total return fall 6.06 percent, a sharp reversal from the quarter before, when their return climbed 10.73 percent, according to the FTSE Nareit All Equity REIT index, which tracks 128 stocks. Meanwhile, the S&P 500 posted a total return of 2.03 percent for the quarter.

Investors had been drawn to REITs during the first half of 2026 largely because of companies’ strong operating fundamentals.

However, rising yields on Treasury bonds and climbing mortgage rates are putting pressure on these stocks.

“There’s concern for not only just debt refinancing costs, interest expense, but cap rates, which in a lot of corners of the real estate sector will have to go up,” said Haendel St. Juste, a REIT analyst at Mizuho. “It’s hard to imagine the 10-year going up as much as it has without cap rates going up.”

And that means that at some point, REITs will feel the heat, even if they have been performing well at the sector and company levels, said Todd Kellenberger of Des Moines-based Principal Asset Management.

“REIT markets and real estate values can’t continually persistently go up on underlying fundamentals alone if interest rates are rising and rising in a way that’s greater than what we’ve seen in improvement in fundamentals,” he said. And so the correction that we’ve seen is probably the right one to account for what is starting to look like a new higher-for longer yield environment.”

The rise in financing costs and cap rates also could trigger a pullback in transactions, which St. Juste said is already starting to happen.

“This is against the backdrop where capital markets and lending markets are still very robust, but they are going to demand a higher rate for that financing,” Kellenberger added.

Another factor that has led REITs to falter lately is rotation trades, said Seth Laughlin, head of real estate strategy and research at Cohen & Steers. At the start of this year, investors began to branch out of focusing on top AI and tech stocks, which benefited REITs even in the face of rising rates. In the past month or so, however, those tech firms again began to outperform.

“It’s been a rotation out of income and back to growth again. That’s been as big a factor in terms of REITs’ recent performance as I think interest rates have been,” he said.

All of the sectors that Nareit, a REIT industry group, saw their total returns slide into the red in the third quarter. Of the major property types, the sectors with the steepest drop were retail (-10.53%) and residential (-10.49%).

While supply in the apartment sector is coming down, it’s not at a fast enough clip to translate into pricing power, Laughlin said. Still, the listed market has priced those challenges in, making those stocks cheaper.

Meanwhile, the major sectors that recorded the lowest declines in their total returns were the health care (-1.09 percent), industrial (-2.89 percent) and data center (-3.87 percent) sectors, which continue to benefit from demographic tailwinds or strong demand.