Real Estate Investment Trusts: Where REITs Fit in Portfolios

The real estate investment trust sector has grown from around 20 companies in the 1970s to 155 companies in 2025. Today REITs own about 10% of commercial real estate properties in the United States.

The common market wisdom is that REITs offer a hedge against inflation—but recent data shows that performance in inflationary environments may be overstated.

Here’s what financial advisors need to know about the true benefits and risks of investing in REITs. For a deeper dive into investment fundamentals, download the full Real Estate Investment Trusts Industry Landscape.

Real estate investment trusts are tax-advantaged vehicles that develop, own, and manage real estate properties. Most REITs focus on owning higher-quality real estate that tends to have less operational risk.

Think of REITs as pass-through vehicles that allow investors to own a diversified real-estate portfolio without double taxation. Investors can also get exposure to a collection of REITs through a real estate exchange-traded fund.

REITs derive most of their revenue from charging tenants rent. To grow internal portfolio revenue, they need a combination of occupancy and rent growth. Most REITs also pay the operating expenses to run the building. Investors provide REITs with the equity capital in exchange for regular dividends. 

Shares of publicly listed REITs can be bought and sold like any mutual or exchange-traded fund. However, non-traded REITs often limit redemptions to less-frequent intervals, like other semiliquid fund types. 

Because of their legal structure, REITs don’t pay corporate taxes on their earnings. Instead, they’re required to pay out at least 90% of their income as shareholder dividends. Investors do pay ordinary income taxes on the dividends they receive. 

Investors can deduct up to 20% of the income they earn from REITs. Financial advisors should talk to clients about the implications of holding REITs in taxable or tax-deferred accounts.

REITs generally avoid cutting their dividends—it scares off many investors looking for reliable income and signals to the market that current cash flows won’t cover future dividend payments.

Since 2000, the average REIT we cover has paid a dividend yield 125 basis points above the 10-year US Treasury interest rate. Except for a few periods, this relationship has remained relatively stable.

We’ve scored the REITs in our coverage to determine the most attractive opportunities for income-oriented investors. Top of the list includes:

• Federal Realty Investment Trust FRT
• Realty Income Corp O
• Americold Realty Trust Inc COLD
• Essex Property Trust ESS
• Ventas Inc VTR

An economic moat is a durable competitive advantage that could allow a company to outperform in the long run. None of the companies in our Morningstar REIT coverage have a moat.

That’s due in part to the high capital intensity of REIT sectors. It’s expensive to purchase properties in office, industrial, apartment, self-storage, hotel, and retail. Most companies don’t consistently and materially outearn their cost of capital. And over time, supply can catch up with growing demand in most regions.

When considering REITs, advisors should closely look at the price/fair value estimate. Investments with more uncertain futures may require a greater margin of safety between its current valuation and its intrinsic value.

Over the past 25 years, there’s been a significant negative correlation between interest rate movements and REIT stock prices. When interest rates rise, REITs tend to underperform broader US equities.

Interest rates have only a small immediate impact on REIT cash flows, as most REIT debt is fixed and well staggered over 10-plus years. However, higher interest rates reduce the spread between acquisition cap rates and the rate on debt used to finance the deals. That reduces the potential value management can create through external growth.

Advisors should monitor interest-rate forecasts and consider rotating income-oriented investors out of REITs and into more risk-free options when they provide higher yields.

The common wisdom held by the market is that REITs outperform during rising inflation. However, this analysis goes back to the 1970s, so nearly all outperformance comes from the late 1970s and early 1980s, when inflation was very high.

Restricting the analysis to just 2000 through the present shows that there is zero relationship between REIT performance and inflation.

All REIT sectors averaged rental rate growth above inflation in the prior economic cycle. However, high inflation also leads to higher expense growth, lower development yields, and likely higher interest rates, which offsets potential performance gains.

Advisors should caution their clients to moderate their expectations for performance gains in inflationary environments.

Senior housing occupancy returned to prepandemic levels in 2025 as the percentage of those over 80 in a senior housing facility has continued its upward trend. Aging baby boomers should generate demand growth of at least 3% each year, which should exceed supply growth most of the next decade.

Medical office provides consistent growth with around 2.5% lease escalators. While growth in the life science sector is slowing as the sector matures, it should provide steady growth.

While leisure and group travel have recovered to prepandemic levels, business travel is still below. 

Hotel spending as a percentage of GDP typically falls dramatically during a recession and then slowly recovers until it plateaus. We anticipate that hotel revenue will plateau at a lower level than 2019 due to permanently lost business travel.

REITs own hotels almost entirely in the upscale, upper-upscale, and luxury segments. The companies in our coverage have undergone recent renovations that should lead to slightly higher growth in future years.

Structural demand drivers have led to strong growth for the industrial sector over the past decade. E-commerce penetration has expanded rapidly, and e-commerce requires 3.5 times more warehouse space than traditional channels.

However, sector fundamentals are slowing down from the elevated levels of past years. Rent growth has been quite weak in recent quarters. Vacancy rates have also swelled due to higher supply and slowing demand in the past two years.

Ultimately, we believe that high mark to market should continue to drive net operating income growth for Prologis Inc PLD. 

Despite more employers requiring it, workers are still reluctant to return to the office. Office leasing volumes have picked up but remain materially below 2019 levels.

In the long run, muted supply-side additions will be the basis for office sector recovery. New office groundbreakings are down about 94% compared with 2019.

During the pandemic, need for space sent people from urban apartments to suburban single-family homes. Since then, demand for single-family home rentals has cooled. We anticipate that net operating income growth will average between 3% and 5% over the next decade.

While e-commerce has pressured brick-and-mortar retail sales, growth should be positive. Even though we anticipate that 40% of all applicable retail sales will move online over the next decade, brick-and-mortar retail sales should be able to continue producing positive sales growth.

Self-storage has been one of the best-performing sectors among REITs with robust growth over the past decade. After exceptionally strong growth in 2021 and 2022, growth in the sector has started to cool down.  

The slowdown in the self-storage sector is best reflected in the rental rates achieved on leases signed by new customers during the quarter. Since 2023, move-in rates remain significantly below the average rent on previously occupied space, meaning there should be continued downward pressure on future rent growth.

For a closer look at industry value drivers and sector forecasts, download the full US REIT Landscape.

Morningstar data also covers 598 listed REITs and 137 unlisted REITs in the United States as of Nov. 7, 2025. With our investment research software, financial advisors can conduct their own analysis with information on:

• Performance, including price vs. fair value
• Key industry metrics
• Financial statements
• Portfolio holdings and property transactions
• Dividends and splits