The United States real estate sector continued to underperform the broader equity market in the third quarter of 2025, even as interest rates showed signs of easing. Over the past 12 months, the Morningstar US Real Estate Index registered a 2.2% decline, a stark contrast to the 17.5% gain posted by the wider US stock market.
This performance is notable because it breaks a recent trend where real estate stocks moved inversely with interest rates. Despite a general decrease in rates during the quarter, the sector failed to gain traction, signaling that other factors are now influencing investor sentiment.
Key Takeaways
- The US real estate sector fell 2.2% over the last 12 months, while the broader US market grew by 17.5%.
- In Q3 2025, real estate underperformed even as interest rates declined, breaking a previously established pattern.
- Average same-store net operating income (NOI) growth has slowed to approximately 2.1%, with expenses slightly outpacing revenues.
- A significant portion of real estate stocks, around 69%, are currently trading at a discount to their fair value estimates, suggesting potential opportunities for investors.
Market Performance and Interest Rate Disconnect
For the past three years, the performance of Real Estate Investment Trusts (REITs) has been closely tied to movements in interest rates. Rising rates typically put downward pressure on real estate valuations, while falling rates provided a boost. This relationship held true for the first half of 2025, with falling rates driving outperformance in the first quarter, followed by a reversal in the second quarter as rates climbed.
However, the third quarter marked a significant departure from this pattern. Despite a general decline in interest rates, the real estate sector did not rally. This suggests that investors are now weighing other fundamental factors more heavily, such as slowing income growth and operational costs.
Understanding the Impact of Interest Rates
Higher interest rates increase the cost of borrowing for real estate companies, which can slow down acquisitions and development projects. They also make lower-risk investments like bonds more attractive, drawing capital away from REITs. Conversely, lower rates have historically made real estate investments more appealing.
Slowing Growth in Net Operating Income
A key factor contributing to the sector's sluggish performance is the flattening of same-store net operating income (NOI). According to company reports from the second quarter, year-over-year NOI growth averaged just 2.1%. While this figure is close to the rate of inflation, it reflects a challenging operational environment.
In many sub-sectors, expense growth has been slightly higher than revenue growth, squeezing profit margins. This trend has tempered enthusiasm, even with second-quarter earnings results largely meeting or slightly exceeding expectations. Most companies have maintained their 2025 guidance, but the underlying growth story has become less compelling for the market.
A Divided Sector
The average NOI growth of 2.1% masks significant differences between property types. Performance was bifurcated, with three sectors showing strong growth while five others reported low to negative growth, highlighting a clear separation between resilient and struggling areas of the market.
Valuation and Investment Opportunities
The recent underperformance has resulted in what appears to be an attractive valuation landscape for the real estate sector. A large number of publicly traded real estate companies are now trading at a significant discount to their estimated intrinsic worth.
Based on current analysis, 69% of real estate stocks under coverage are rated as 4-star or 5-star opportunities, indicating they are materially undervalued. Specifically:
- 13% are in the 5-star range (most undervalued)
- 56% are in the 4-star range
- 18% are in the 3-star range (fairly valued)
- 10% are in the 2-star range
- 3% are in the 1-star range (most overvalued)
This widespread discount suggests that the market may be overly pessimistic about the sector's long-term prospects, creating potential entry points for value-oriented investors.
Analysis of Selected Real Estate Stocks
Amid the broad market downturn, certain companies stand out due to their specific circumstances and potential for future recovery. Analysts have highlighted three firms in different sub-sectors that may present long-term value.
Americold Realty Trust (COLD)
Americold, a specialist in temperature-controlled warehouses, has seen its stock price fall by approximately 50% over the past year. This correction is largely due to concerns about falling occupancy rates and increasing pressure on rents. A combination of moderating demand and new supply additions has challenged the company's core rental business.
"We agree that the near-term outlook may be difficult, but the current valuation provides an attractive entry point for long-term oriented shareholders."
However, there are signs that speculative supply growth will slow in the coming years. This could help stabilize the market and support a recovery in occupancy, making its current low valuation a point of interest for investors with a long-term horizon. The fair value estimate for COLD is $27.00.
Federal Realty Investment Trust (FRT)
Federal Realty focuses on high-quality retail centers located in densely populated areas with high per capita incomes. This premium portfolio is expected to generate retail sales growth above the brick-and-mortar average, supporting high occupancy and strong rental growth.
The company's stock has faced pressure partly because 10% of its rental income is derived from office tenants, a segment facing uncertainty. Despite this, its strong growth prospects and reliable dividend are key strengths. Analysts believe its high-quality portfolio justifies a premium valuation compared to its peers. The fair value estimate for FRT is $137.00.
Healthpeak Properties (DOC)
Healthpeak Properties has strategically positioned itself by focusing on medical office buildings and life science facilities. These sectors are known for providing steady, recession-resistant revenue streams. The company's stock sold off amid concerns over rising interest rates, but its underlying assets remain stable.
Furthermore, Healthpeak has a development pipeline projected to produce yields well above its cost of capital, which should drive additional cash flow growth for shareholders. The current market valuation appears to undervalue this stable portfolio, with a fair value estimate set at $27.50.
