Real Estate: Sector Outperformed in Q1, Though Performance Still Lags Broader Market Over Last 12 Months

While the Morningstar US Real Estate Index is up about 23% since July 2024, the index has underperformed the Morningstar US Market Index by about 5% over the same timeframe. Relative performance generally moves inversely to changes in interest rates, with falling interest rates driving real estate’s outperformance and rising rates driving underperformance. This relationship did not hold in the second half of 2025, due to the strong performance of AI-related stocks, although falling rates have driven sector outperformance in 2026 so far.

Our real estate coverage currently trades at a 12% discount to our estimate of fair value. Currently, 14% of the sector is trading in the 5-star range, 51% in the 4-star range, 29% in the 3-star range, 6% in the 2-star range, and none in the 1-star range.

The Real Estate Index rose just 2.7% over the trailing 12 months, which is significantly below the 16.0% gain seen by the broader US equity market over the same period. Most of the sector’s gains occurred in the first quarter of 2026, as it outperformed the broader US equities market’s decline.

The sector’s performance over the past few years has largely been driven by interest rate movements, as it is negatively correlated with rate changes. However, the sector saw flat growth in both the third and fourth quarters of 2025, despite interest rates generally falling over that timeframe. Still, the relationship resumed in the first quarter of 2026, as a February rate decline was linked to the REIT sector’s outperformance.

The REITs also reported solid 2.8% average same-store net operating income growth year over year in February, an improvement over the 0.8% reported for the third quarter of 2025. 2026 same-store NOI growth and FFO guidance were generally in line with our expectations, though we frequently find that many management teams traditionally set conservative initial goals so they can beat and raise guidance throughout the year.

Top Real Estate Sector Picks

Kilroy Realty

• Fair Value Estimate: $51.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

Kilroy KRC shares have corrected by more than 60% since the onset of the covid-19 pandemic, even as the company’s NOI has increased materially. We believe the selloff has been overdone and the market is not recognizing the value of the company’s non-office-related assets and its land bank. Kilroy has a high-quality portfolio with an average building age of 11 years compared with 34 years for other office REIT peers. The company should be a prime beneficiary of the flight-to-quality trend in offices. Further, the company has a strong balance sheet with the lowest leverage within our office REIT coverage.

Invitation Homes

• Fair Value Estimate: $38.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

Invitation Homes INVH is down over the past year as occupancy continues to slowly decline due to the excess demand created by the pandemic slowly weaning off, and because operating expenses growth has been higher than revenue growth. However, occupancy should settle at its historical average, and operating expenses should decelerate toward revenue growth, both of which should allow same-store NOI growth to pick up in the coming years. We like the company’s mix of starter homes tightly grouped together, which should allow the company to run the portfolio efficiently and maintain high operating margins.

Healthpeak Properties

• Fair Value Estimate: $26.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

Healthpeak’s DOC management team strategically focused the company around the medical office and life science portfolios. These sectors should provide steady and recession-resistant revenue growth for the firm. Healthpeak’s development pipeline should also produce yields above the company’s cost of capital even in a higher interest rate environment, producing additional cash flow growth. The company sold off due to rising interest rates, but we believe the current market-implied cap rate undervalues Healthpeak’s portfolio of stable assets.