Falling real yields and elevated inflation have created a favourable backdrop for real estate, while fundamentals are expected to accelerate.
As the US Federal Reserve resumes rate cuts and inflation expectations remain elevated, commercial real estate is poised to benefit. Listed REITs have historically outperformed in similar environments, and recent trends suggest the market is already responding.
Against this backdrop, and in the wake of the recent quarter-point cut, we have taken a closer look at several data points that we believe are notable.
To start, while every cycle brings with it idiosyncrasies, an examination of past Fed rate-cutting periods indicates REITs have performed well when the Fed starts easing. And given the Fed’s efforts to telegraph policy changes, it is not surprising to see REIT performance in the six months prior respond positively in most instances (Exhibit 1).
The Fed’s cuts last year coincided with particularly strong results for listed REITs, which enjoyed a gain of 18% in the six months before the September 2024 cut. The resumption of rate cuts could be a further catalyst for improved REIT returns going forward, but this leads to a second data point that we believe merits a closer look.
Exhibit 1
US REITs after the 1st Fed cut
Non-annualized total returns 6 months before and after the 1st cut, past 6 cutting cycles
At September 22, 2025. Bloomberg. US REIT performance measured by the FTSE NAREIT All Equity REIT Index.
While the change in interest rates is important, arguably more significant is the change in real rates – ie, rates adjusted for inflation.
The rate increases that accelerated in 2022 – culminating in 10 rate hikes by the central bank – led to a significantly higher cost of capital. This drove a sharp repricing in commercial real estate (CRE) values, first in the listed markets and then in the private markets (33% and nearly 20% declines, respectively, peak to trough).
The bulk of the change in rates occurred in real rates, which rose from –1.0% to 2.5%, while inflation expectations (expressed by 10-year inflation breakevens) remained muted.
Historically, that combination of rising real rates and flat or falling inflation has been challenging for CRE values. It was this dynamic that drove repricing in both listed and private real estate. Cap rates increased without the offsetting rent growth projections that typically accompany higher inflation expectations.
Today’s backdrop reflects a reversal of those trends. Real yields have declined to 1.7% and now sit 70 basis points (bp) below their 2023 peak. Simultaneously, inflation breakevens are trending higher (Exhibit 2).
Exhibit 2
Real yields expected to fall; inflation expected to climb
US 10-year Treasury: Real yields vs. breakevens
At August 31, 2025. Source: LSEG Datastream.
We believe real yields will continue to decline, while fiscal and monetary policy – and rising price pressures – will drive inflation expectations higher.
Historically, falling real yields and rising inflation have created a favourable backdrop for real estate. Since 1997, listed real estate (22.5%) has outperformed US equities (15.7%) in such environments (annualized six-month returns, Exhibit 3).
In contrast, rising real yields and falling inflation breakevens – which is what occurred three years ago – have historically created the most challenging environment for listed real estate.
Exhibit 3
Falling real yields and rising inflation is a favourable backdrop for real estate
Average annualized 6-month rolling total returns January 1997 – December 2024
As of December 31, 2024. Source: Bloomberg. U. REITs measured by the FTSE NAREIT All Equity REIT Index. US equities measured by the S&P 500. U.S fixed income measured by Bloomberg US Aggregate Corporate Index.
Another key point is that the current pronounced decline in real rates has yet to translate to REIT returns this year.
Analysis of prior instances shows healthy performance in both listed and private markets when real rates fall between 0 and 50 bp (Exhibit 4). Performance has historically been negative when the move exceeds 50 bp, as these larger declines in real rates have typically coincided with dislocations in the economy that outweighed the benefits to real estate.
However, this has not been the case more recently: In the three quarters since 2012 when real rates fell by more than 50 bp, REITs delivered an average return of 13.5%.
Exhibit 4
Quarterly real estate performance vs change in real rates
(January 2000 – June 2025)
At June 30, 2025. Source: Bloomberg. Listed REITs measured by FTSE NAREIT All Equity REIT Index. Private real estate measured by the NCREIF NFI-ODCE Index (Net).
As we have often pointed out, listed REITs typically lead the private market at inflection points.
Given the sizeable move in real rates experienced since their peak in the beginning of the year, it is surprising that listed REITs have not yet reflected the expected performance boost.
One explanation may be the timing of the real estate cycle. The pandemic triggered seismic shifts, such as accelerating e-commerce and remote work. Those unprecedented changes and impacts on CRE operations are beginning to stabilize after three years of decelerating fundamentals.
As investors begin to focus on ’26 and ’27, we expect that operating fundamentals will reaccelerate and provide greater supply/demand balance, with an acceleration in rent and occupancy growth (Exhibit 5).
We expect listed REIT earnings growth to see a similar acceleration, from 3.3% in ’25 to 7.6% and 7.5% in ’26 and ’27, respectively. That clarity should serve as a near-term catalyst for performance in the listed market.
Exhibit 5
Rent, occupancy rates expected to accelerate
Sector-level combined annual rent and occupancy growth
