Why REITs Might Outperform Stocks in 2024

Why REITs Might Outperform Stocks in 2024

If you spent 2023–2024 watching the tug-of-war between inflation data and interest-rate expectations, you know how violently markets can pivot. Under the surface, one asset class has been quietly resetting for a better cycle: real estate investment trusts (REITs). After two years of pressure from rising rates, many REITs now sit with healthier balance sheets, higher cash yields, embedded rent growth, and valuations that still discount a lot of bad news. If 2024 continues to shift toward lower policy rates and a cooling inflation backdrop, the math behind REIT cash flows could finally overpower the headwinds.

This isn’t a blanket claim that all REITs will soar. But the conditions for relative outperformance versus broad equities are lining up: more compelling income, potential valuation mean-reversion, and sector-specific growth drivers aligned with secular demand. Below is a practical, fact-driven look at why REITs may be set up for a stronger year—and how to approach them with discipline.

The 2024 setup: rates, inflation, and the REIT playbook

• The macro lever: REIT total returns are sensitive to interest rates because property values are often framed around capitalization rates (cap rates). When the 10-year Treasury yield falls or stabilizes and credit spreads improve, market cap rates tend to compress, boosting real estate valuations.
• Historical context: In past cycles, listed U.S. equity REITs have performed strongly in the 12 months following the last Fed rate hike. Industry analyses have repeatedly shown that the combination of stabilizing rates and pent-up transaction activity can spark multiple expansion and NAV (net asset value) convergence. While each cycle differs, periods after rate plateaus or early cuts have often delivered above-average REIT returns.
• Inflation normalization: 2024 has largely trended toward disinflation from 2022’s peaks. Lower inflation, if sustained, reduces the pressure on discount rates and debt costs. Many REIT leases carry embedded rent escalators—some CPI-linked, others fixed 2–3%—so nominal cash flows can still grow while discount rates drift down, widening net present value.
• Fixed-rate shields: Entering 2024, many REITs had already termed out debt and kept significant proportions fixed (often 80–90% fixed-rate), with weighted-average maturities around five to seven years. That structure limited the squeeze from 2022–2023 hikes and positioned balance sheets to benefit as refinancing waves hit a potentially lower-rate environment.

Why this matters now: If the market continues to price a softer-rate path through 2024–2025, the “double-positive” for REITs is higher present value of cash flows plus improved transaction markets that validate private valuations. In plain terms, cheaper debt and steadier cap rates can make real estate worth more, and public REIT share prices tend to reflect that.

The valuation gap: discounts to NAV and FFO multiples

After two rough years, many REITs have traded at discounts to their underlying property values, while some sectors with secular tailwinds carry premiums. Here’s what that spread means:

• NAV discounts: During 2023, broad baskets of REITs commonly traded 10–20% below estimated NAVs; that discount narrowed in stretches of 2024 but remains present in numerous sectors. NAV isn’t a single truth—it’s an estimate—but persistent public discounts often resolve either through share-price appreciation, asset sales that validate values, or accretive buybacks when they exist.
• FFO/AFFO multiples: Funds from operations (FFO) and adjusted FFO (AFFO) are core REIT metrics. Many quality REITs in 2024 still trade at FFO multiples below long-term averages, even as their balance sheets improved relative to the Global Financial Crisis era. When the market grows more comfortable with the rate outlook, multiples can expand toward historical norms.
• Yield spread: Dividend yields for equity REITs often cluster around 3–6%, versus an S&P 500 dividend yield closer to 1.5–1.7% in recent years. In 2024, with money-market yields still elevated but expected to decline with policy rates, the relative appeal of durable equity income can rise. If the 10-year Treasury drifts lower, a 300–400 bps spread from REIT dividends plus growth can look compelling.

The cap rate math: Suppose a property generates $10 million of annual NOI. At a 6% cap rate, the implied value is roughly $167 million. If investor demand or borrowing costs drive the cap rate to 5.5%, the value rises to about $182 million—roughly a 9% gain without any NOI growth. A modest 50–75 bps compression across a portfolio can meaningfully lift NAV, especially for REITs holding institutional-quality assets in supply-constrained markets.

Income today, growth tomorrow: dividends, escalators, and development

REITs aren’t just bond substitutes. Their income can grow, and they often have external growth levers:

• Dividend durability: Many large REITs maintain payout ratios around 60–80% of AFFO, allowing them to reinvest while still paying meaningful dividends. The focus is on sustainable payouts supported by contractual leases, not one-off distributions.
• Built-in rent growth: Long-term leases frequently include fixed 2–3% annual bumps or CPI-linked escalators. Industrial, data centers, and single-tenant net lease portfolios commonly benefit from these structures. In a cooling inflation world, CPI-linked leases largely normalize, but fixed escalators continue to compound rent rolls.
• Leasing spreads: Sectors like industrial and select residential markets have enjoyed robust leasing spreads—new or renewed leases signed at higher rates than expiring ones—reflecting tight supply and strong demand. Even if spreads moderate from 2021–2022 peaks, they remain a tailwind.
• Development pipelines: Where supply-demand dynamics allow, REITs can develop at yields exceeding acquisition cap rates. Delivering projects at, say, 7–9% stabilized yields when market cap rates are 5–6% creates intrinsic value. Leading industrial and data center REITs, for example, have repeatedly harvested value this way.
• External growth: With public market cost of capital improving, well-managed REITs may again raise equity or tap debt to make accretive acquisitions. The magic happens when a REIT’s implied cap rate is below acquisition cap rates, making additions per-share accretive to AFFO.

The upshot: Total return for a REIT in 2024 can come from a 3–6% dividend, mid-single-digit NOI growth from escalators and leasing spreads, plus potential valuation uplift as rates stabilize. That cocktail compares favorably to many slow-growing dividend payers in the broad equity market.

Where the wind is blowing: sector-by-sector outlook

REITs are not monolithic. Performance hinges on sector fundamentals and supply. Highlights and caution flags:

• Industrial/logistics: E-commerce, onshoring, and inventory normalization continue to support demand. While new supply delivered in some markets, leasing remains resilient, especially near major ports and population hubs. Examples: Prologis (PLD) and Duke Realty’s legacy assets—high-barrier locations with modern specs—can push positive rent spreads even if overall market rent growth moderates.
• Data centers: AI and cloud workloads are straining power availability, not just square footage. Operators with access to power and land in key metros (Northern Virginia, Phoenix, Dallas) enjoy pricing power and long pre-leasing. Equinix (EQIX) and Digital Realty (DLR) have capitalized on interconnection and hyperscale demand. Watch power procurement, development risk, and customer concentration.
• Towers: American Tower (AMT) and Crown Castle (CCI) faced earlier headwinds from carrier churn and Sprint decommissioning, but 5G densification and fixed wireless continue to support long-term lease growth. Tower cash flows are long-dated, inflation-resilient, and often CPI-linked abroad; rate stability improves their relative appeal.
• Residential: Coastal apartment names like AvalonBay (AVB) and Equity Residential (EQR) benefit from high barriers to new supply, while Sunbelt-focused operators such as Mid-America (MAA) face near-term supply digestion yet healthy migration trends. Single-family rental platforms saw strong demand amid high mortgage rates; renewal spreads remain positive but moderating.
• Healthcare: Senior housing demand is accelerating with demographics, reversing pandemic-era occupancy troughs. Operators like Welltower (WELL) leaned into operating partnerships capturing NOI recovery. Medical office is steadier, with long leases and healthcare credit underwriting.
• Retail: Open-air shopping centers and necessity retail proved more durable than feared. Well-leased centers with grocers and service tenants have steadily increased occupancy and rents. Simon Property Group (SPG) reshaped malls toward experience, while net lease REITs (e.g., Realty Income, O) deploy capital into diversified single-tenant portfolios with predictable cash flows.
• Self-storage: Pandemic-era strength normalized in 2023–2024 as new supply hit select markets. Long-term fundamentals remain healthy with strong margins and dynamic pricing capabilities. Public Storage (PSA) and Extra Space (EXR) use scale and technology to manage through cycles.
• Gaming and experiential: VICI Properties (VICI) demonstrates how triple-net leases with CPI escalators and high-quality counterparties can produce dependable growth. Experiential tenants, from casinos to entertainment districts, benefit as travel stabilizes.
• Office: The clear laggard. Elevated vacancy, refinancing hurdles, and uncertain workplace trends make the sector a selective, high-risk trade. Some Sunbelt or life-science clusters are better positioned, but broad office exposure remains a drag for diversified investors.

The takeaway: The 2024 case for REIT outperformance is not about office rebounds. It’s about overweighting sectors with secular tailwinds—industrial, data centers, towers, senior housing, necessity retail—while underweighting structurally challenged segments.

Catalysts you can actually track

• Fed path and bond yields: A declining or stable 10-year Treasury yield and narrower credit spreads support lower cap rates and better financing.
• Transaction comps: Watch quarterly asset sales and JV deals. When cap rates in private transactions compress, it validates higher NAVs for public REITs.
• Development leasing: Pre-leasing levels and achieved rents for data centers and industrial projects are leading indicators for future cash flow.
• Same-store NOI guidance: Upward revisions or resilient mid-single-digit growth across sectors signal healthy fundamentals.
• Balance-sheet actions: Refinancing at lower coupons, terming out maturities, or opportunistic unsecured bond issuance at improving spreads can lift AFFO outlooks.
• Capital recycling: Dispositions of non-core assets near or above book value and reinvestment into higher-yield opportunities drive accretion.

What could go right—and what could go wrong

Upside scenarios:

• 50–100 bps rate cuts: Even a gradual easing path can compress discount rates and revive transaction markets.
• Stable growth: A soft-landing economy with low to mid-single-digit GDP growth sustains tenant demand across logistics, residential, and retail.
• Supply discipline: Tighter construction lending limits oversupply in many sectors, preserving landlord pricing power.

Downside scenarios:

• Sticky inflation: A re-acceleration forces higher-for-longer policy, keeping financing costly and pressuring cap rates.
• Recession: Tenants delay expansions, occupancy slips, and leasing spreads compress; sectors with shorter lease terms (e.g., storage, lodging) feel it first.
• Credit accidents: Stress in private real estate or regional banks curtails liquidity; even well-positioned public REITs can re-rate lower on sentiment.

Positioning implication: Build a portfolio that can handle a mild slowdown (defensive cash flows, longer lease terms, necessity tenants) while keeping exposure to structural growth (industrial, data centers, towers). Avoid excessive leverage and short-duration debt.

How to build a 2024 REIT allocation

A practical blueprint, whether you prefer individual names or ETFs:

• Decide your sleeve size: For a balanced equity portfolio, a 5–15% allocation to listed REITs offers diversification and income without dominating risk. Pair with broad equities and bonds.
• Choose access:
  • Core ETF: A low-cost, broad REIT ETF provides instant diversification across sectors and market caps.
  • Tilted ETFs: Consider sector-specific funds (industrial, data centers, towers) if you have a view.
  • Single-name selection: Target quality balance sheets and sector leaders if you’re comfortable with company-level risk.
• Diversify drivers:
  • Rate-sensitive cash flow: Net lease, towers (long-dated leases).
  • Secular growth: Data centers, logistics, senior housing recovery.
  • Defensive necessity: Grocery-anchored retail, medical office.
• Blend yield and growth: Combine stalwarts with 3–5% yields and dependable escalators with a few higher-growth names where dividend yield may be lower but AFFO growth is higher.
• Implement in stages: Dollar-cost average across months and use dips on rate spikes to add, since REITs often sell off when yields jump short term.

Due diligence checklist: five numbers that matter

When you analyze a REIT, start with these essentials:

• Net debt/EBITDAre: Prefer 4.5–6.0x for most sectors. Lower leverage provides flexibility in choppy markets.
• Interest rate mix and term: Aim for 70–90% fixed-rate and 4–7 years weighted-average maturity. Short-maturity walls can be risky if refinancing spreads widen.
• AFFO payout ratio: 60–80% is generally healthier, leaving room for reinvestment and dividend growth.
• Same-store NOI growth: Seek sustainable mid-single-digit growth supported by escalators and occupancy gains.
• Weighted-average lease term (WALT) and escalators: For stability, long WALTs with dependable rent bumps; for growth, shorter WALTs where market rents are well above in-place rents.

Other helpful tells:

• Development yield vs. market cap rate: If the spread is >200 bps, development can create material value.
• Occupancy and leasing spreads: Rising occupancy and positive blended spreads signal pricing power.
• Unencumbered assets: More unsecured, unencumbered assets typically mean better access to capital.

Tactics for a choppy year

• Lean into volatility: Historically, REITs overreact to rate spikes. When the 10-year jumps on a hot data print, consider adding to quality names if the thesis is unchanged.
• Prefer internal growth visibility: CPI-linked or fixed escalators and embedded mark-to-market rents help you ride out macro noise.
• Rebalance around catalysts: Earnings seasons, Fed meetings, and major economic data releases (CPI, jobs) often reset expectations and create entry points.
• Mind tax location: In the U.S., REIT ordinary dividends are generally eligible for the 20% pass-through deduction and can include a return-of-capital component. Tax-advantaged accounts can simplify the picture; consult a professional for specifics.
• Avoid value traps: High dividend yields can mask weak balance sheets or deteriorating assets. Confirm coverage with AFFO and look at debt maturities.

Comparing REITs and broad stocks in 2024

• Income profile: REITs frequently yield 2–4x the S&P 500’s dividend yield. If cash yields on short-term instruments fall with rate cuts, equity income regains luster, and REITs stand out.
• Valuation starting point: Mega-cap tech’s strong run left broad equity indices top-heavy. Many REITs still trade at subdued FFO multiples and residual NAV discounts, providing more room for multiple expansion if rates cooperate.
• Earnings composition: S&P 500 earnings growth is concentrated in a handful of tech and communication-services names. REIT earnings growth, while steadier, can be diversified across sectors with different economic drivers.
• Rate sensitivity: Both tech and REITs are sensitive to discount rates, but REITs can benefit more directly from falling borrowing costs and cap rate compression that re-prices physical assets.
• Correlation benefit: REITs add diversification to a stock-bond mix. Even within equities, sector drivers differ meaningfully from software or semiconductors.

A balanced investor doesn’t have to choose one or the other; pairing REITs with quality equities can improve portfolio yield and resilience.

Case studies: two hypothetical setups

Case A: Undervalued open-air shopping center REIT

• Setup: A grocery-anchored shopping center REIT trades at a 7% implied cap rate, while recent private transactions in similar markets clear at 6.25%. Balance sheet at 5.5x net debt/EBITDAre, 85% fixed-rate debt, 6-year WAM.
• Thesis: If transaction markets thaw and cap rates compress 50–75 bps, NAV rises 8–12%. Meanwhile, the REIT pays a 4.8% dividend, covered at 70% of AFFO, and posts 2–3% same-store NOI growth via rent bumps and incremental occupancy gains.
• Path to outperformance: Total return potential combines 4.8% yield, 2–3% NOI growth, and 8–10% valuation uplift over 12–18 months if rates ease. Even with flat multiples, you collect rising cash income.

Case B: Power-constrained data center platform

• Setup: A data center REIT trades at a premium FFO multiple due to secular AI demand. Development yields at 8% on cost; market cap rates around 5.5%. Pre-leasing of new campuses is 70% with strong pricing.
• Thesis: Access to power and land is the bottleneck. With long pre-leases and escalators, the development spread (roughly 250 bps over market cap rates) creates value as projects stabilize.
• Path to outperformance: While the dividend yield is lower (2–3%), AFFO per-share growth in the high single digits compounds returns. If rates decline, the premium multiple can hold or expand, magnifying growth.

Lesson: You don’t need every REIT to be cheap. Some are cheap with stable income; others are premium with superior growth. A blended approach can deliver attractive risk-adjusted returns.

Practical signals that fundamentals are winning

Watch for these confirmations through 2024:

• Positive leasing spreads and rising pre-leasing for developments.
• Debt refinanced at equal or lower coupons versus maturities two to three years prior.
• Asset sales at cap rates equal to or below where the market had feared.
• Dividend increases from REITs that paused growth in 2022–2023.
• Guidance that nudges same-store NOI toward the high end of initial ranges.

Each is incremental, but together they suggest the cycle has turned from defense to measured offense.

A simple, numbers-first framework to evaluate any REIT today

• Step 1: Balance sheet triage
  • Net debt/EBITDAre in the mid-5x range or lower? Good.

  • 75% fixed-rate debt, WAM >5 years? Better.

  • Staggered maturity ladder? Essential.
• Step 2: Earnings durability
  • AFFO payout ratio ≤75%?
  • Diverse tenant base and limited top-10 tenant concentration?
  • For specialized REITs (data centers, towers), contracts with investment-grade counterparties?
• Step 3: Growth visibility
  • Embedded escalators and mark-to-market rents provide a base.
  • Development yields at least 150–200 bps above exit cap rates.
  • External growth discipline: accretive acquisitions only.
• Step 4: Valuation sanity check
  • Are you buying below NAV or at a growth-justified premium?
  • FFO multiple versus history and versus peers.
• Step 5: Risk map
  • Supply pipeline in your markets (can new supply dilute pricing?).
  • Regulatory and tax risk (rent control, zoning).
  • Interest-rate sensitivity (floating-rate debt, near-term maturities).

Score each bucket 1–5. Avoid names that score poorly on balance sheet and durability even if the yield tempts you.

Putting it together: a sample allocation template

For illustration only—not advice—here’s how a diversified REIT sleeve could look:

• 40% core diversifiers: A broad REIT ETF or a blend of large-cap diversified names to anchor income and reduce idiosyncratic risk.
• 30% secular growth: Data centers, industrial, and towers with visible demand pipelines.
• 20% defensive cash flow: Grocery-anchored retail, medical office, and triple-net portfolios with long WALTs.
• 10% opportunistic: Senior housing recovery, select residential markets, or discounted NAV plays with clear catalysts.

Rebalance quarterly based on valuation and fundamentals. If rates unexpectedly spike, consider shifting 5–10% from growth to defensive until bond markets settle.

Why the odds tilt toward REITs in 2024

Three forces stack the deck:

• Better starting valuations: Many REITs still haven’t fully recovered multiples lost during the 2022–2023 rate shock, even though balance sheets are healthier than in prior cycles.
• Rate tailwind potential: Even modest declines in benchmark yields can unlock cap rate compression, accretive refinancing, and more liquid transaction markets—all direct feed-throughs to real estate value.
• Secular demand: From AI power-hungry data centers to e-commerce logistics and aging demographics in healthcare, multiple REIT sectors have long-run growth that doesn’t depend on a roaring economy.

None of this guarantees a straight line up. But the asymmetry looks favorable: the downside from already-reset valuations and prudent leverage appears contained relative to the upside from income, growth, and multiple expansion. For investors fatigued by narrow leadership in broad equities, REITs offer a different engine of return.

In 2024, if you want an asset class that pays you while you wait, ties directly to real assets, and could catch a rising wind as rates ease, REITs deserve a fresh look. Start with quality, diversify by driver, and let the numbers—not the noise—guide your moves.