No. Despite last week’s rate cut, we do not recommend that most investors increase their core real estate exposure. Although real estate assets should benefit from renewed Federal Reserve easing—which would lower debt costs and improve relative yields—valuations remain elevated and sector-specific challenges remain. While neutral on broad core real estate exposures at this time, we continue to like select value-add opportunities driven by secular trends like AI, digitalization, and demographics.

Core US real estate assets—both public and private—have underperformed in recent years, pressured by headwinds including elevated interest rates, stretched valuations, and supply/demand imbalances in categories like office and apartments. The FTSE® NAREIT All Equity REITs Index returned 3.4% annually over the past three years (private returns were even worse^[1]The CA Private Real Estate Index generated a negative return for the three years ended March 31, 2025.), underperforming equities and other risk assets. While longer-term returns are higher, recent performance has also reinforced our view that real estate investments are not particularly effective in protecting against spikes in inflation.

These lackluster returns have improved valuations but not to an extent that suggests high returns. US REITs now trade at 21x funds from operations, down from their 2021 peak, but still 40% above the 15x historical average. Meanwhile, the current 65-basis point (bp) spread between US REIT cap rates and BBB corporate bonds is less than half its 20-year average. This narrow spread further suggests that US REITs do not offer attractive value and argues against increasing core allocations.

Weak income growth in recent years has also impacted performance, though longer-term trends look more reassuring. According to NAREIT, US equity REITs have grown net operating income (NOI) by a compounded 8.7% per year over the last five years, and even more over the past decade. NOI growth has been strongest for secular winners including industrial (benefiting from ecommerce demand) and data centers (growth of cloud, AI, etc.). In contrast, categories such as office and hotels have experienced softer growth.

Still, rising vacancy rates and increased supply threaten income growth across many segments. Despite a growing number of return-to-office mandates, the current 14.6% vacancy rate for office remains close to levels seen after the Global Financial Crisis. Increased supply means the apartment vacancy rate has also risen around 200 bps since post-pandemic lows to 8%. Even industrial real estate has seen vacancy rates rise to the highest level since 2017 and income growth slow, given both supply and a plateauing share of retail sales from ecommerce.

Rate cuts should benefit commercial real estate assets by lowering borrowing costs and making their dividends seem more attractive relative to alternatives like investment-grade bonds. They should also flatter valuations by lowering the discount rate on future expected cash flows. Indeed, historically REITs have posted healthy returns during the 12-month period following an initial Fed rate cut, as long as recession was avoided.

However, rate cuts alone do not warrant boosting core real estate allocations. Low transaction volumes in recent years suggest valuations remain elevated in some categories. Focusing on short-term rates also obscures the fact that many real estate assets are financed with longer-term (ten years or longer) loans. While it’s possible that long-term rates fall in lockstep with short-term rates, it is not guaranteed, given inflationary pressures and the prospect of increased Treasury issuance pushing up yields.

Current valuations and sector-specific challenges make larger allocations to core real estate unattractive for most investors. Instead, we recommend investors target secular growth areas, such as digitalization (e.g., cell towers, data centers) and demographic-driven segments (e.g., senior living), where skilled operators can unlock above-trend income growth. Despite select opportunities, core real estate remains expensive, and fundamentals are weak. More compelling opportunities exist both within other real asset categories and across the broader spectrum of risk assets.

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Wade O’Brien, Managing Director, Capital Markets Research