Real Estate: Sector Outperformed in Q2, Though It Still Lags the Broader Market Over Last 12 Months

The Morningstar US Real Estate Index rose just 9.2% over the trailing 12 months, which is significantly below the 26.9% gain seen by the broader US equity market. While the sector rose in the second quarter, it still trails the broader US equities market.

The sector’s performance over the past few years has largely been driven by interest rate movements. However, the sector saw flat growth in both the third and fourth quarters of 2025, despite interest rates generally falling over that timeframe. Their reverse correlation resumed in 2026, as a decline in rates in February was linked to the REIT sector’s outperformance, before higher rates in the second quarter led to real estate trailing the broader market. In April and May, REITs reported solid 4.2% average same-store net operating income year-over-year growth for the first quarter of 2026. While that was driven by 11.4% growth from hotel REITs and 8.4% growth from healthcare REITs, all real estate sectors reported positive growth for the first time since the first quarter of 2023.

The real estate sector is currently trading below our fair value estimates. Our real estate coverage currently trades at a 6% discount to our estimate of fair value. Currently, more than half (57%) is trading in the 4-star range, and another 34% is trading in the 3-star range. Meanwhile, just 3% of the sector is trading in each of the other ranges.

Though long-term interest rates have risen about 40 basis points since the start of November 2025, the Real Estate Index outperformed the Morningstar US Market Index by about 3% over that time. However, the rise in interest rates seen in March did not translate to the sector underperforming as real estate fundamentals started to improve. Every REIT sector reported positive same-store net operating income growth in the first quarter, the first time every sector has been positive since the first quarter of 2023.

Top Real Estate Sector Picks

Kilroy Realty KRC

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

Kilroy shares have corrected around 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.

Park Hotels and Resorts PK

• Fair Value Estimate: $19.50
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

Stagnating hotel industry revenue led to Park Hotels and the rest of the hotel industry selling off over the past four years. However, hotel industry revenue per available room improved in the fourth quarter of 2025 and again in the first quarter of 2026. The completion of renovation projects led to Park’s peers seeing strong stock price performance over the past six months, but Park’s fundamentals lagged as its largest project didn’t finish until May 2026. We believe the completion of that project will drive fundamental growth for Park above industry average for the next few years, which should allow its share price to catch up to its hotel REIT peers.

Invitation Homes INVH

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

Invitation Homes is down since the third quarter of 2024, as occupancy has declined due to the excess demand created by the pandemic slowly wearing 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.