Real Estate: Sector’s Underperformance Continued in Fourth Quarter as Net Operating Income Growth Slowed

The Morningstar US Real Estate Index rose 4.14% over the trailing 12 months, significantly below the 17.35% gain seen by the broader US equity market. The sector also underperformed the broader market in the fourth quarter, declining 1.95% versus the market’s 2.43% gain. Real estate’s results over the past few years have largely been driven by interest rate movements, as the sector’s performance is negatively correlated with rate changes. However, the sector declined in both the third and fourth quarters despite rates generally falling.

Average same-store net operating income year-over-year growth was just 0.8% for REITs in the third quarter, as expense growth remains slightly ahead of revenue growth in most sectors, while a handful of sectors face demand headwinds. Most companies reported results that were generally in line with or slightly above our expectations on their third-quarter earnings calls, and our estimates for 2025 generally remain within management guidance for the year.

The average real estate stock under our coverage currently trades at a 12% discount to our fair value estimate, which is better than the North American average of an approximately 4% discount. Currently, 16% of the sector is trading in the 5-star range, 54% is in the 4-star range, 19% is in the 3-star range, 11% is trading in the 2-star range, and none are in the 1-star range.

While the US Real Estate Index is up 4.14% in 2025, it has underperformed the US Market Index by approximately 13.00%. Relative performance generally moves inversely to changes in interest rates, with falling rates driving real estate outperformance and rising rates driving underperformance. However, the sector underperformed in the third and fourth quarters despite falling rates. REITs on average reported same-store net operating income growth of just 0.8% during the third quarter, though performance was bifurcated between three strong sectors and three sectors with negative growth.

Top Real Estate Sector Picks

Americold Realty Trust

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

Americold’s COLD stock price has corrected about 50% in the past year. Much of the correction can be attributed to concerns about a difficult near-term outlook, as occupancy rates have fallen and rents are under increasing pressure. The pressure on the core rental segment fundamentals is both a function of moderating demand and incremental supply-side additions in recent years. There are indications that speculative supply growth will be lower in the upcoming years, supporting occupancy recovery. We agree that the near-term outlook may be difficult, but the current valuation provides an attractive entry point for long-term oriented shareholders.

Federal Realty

• Fair Value Estimate: $137.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

Federal Realty’s FRT high-quality retail centers should produce higher retail sales growth than the brick-and-mortar average, keeping occupancies high and driving high re-leasing spreads. Federal Realty’s portfolio has the highest average population density and per capita income among all shopping center REITs. The company’s strong internal and external growth prospects should also enable Federal to maintain a high dividend yield. We believe the company has sold off due to 10% of rent coming from office tenants, but Federal’s high-quality portfolio should trade at a multiple premium to the industry and its shopping center peers.

Healthpeak Properties

• Fair Value Estimate: $27.50
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

Healthpeak’s DOC management team strategically focused the company on 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 deliver yields above the company’s cost of capital, even with higher interest rates, driving additional cash flow growth for shareholders. 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.