R
eal‑estate investment trusts (REITs) have expanded from roughly 20 entities in the 1970s to 155 today, holding about 10 % of U.S. commercial property. While many investors view REITs as an inflation hedge, recent evidence suggests the benefit may be exaggerated. Below is a concise guide for advisors on the true upside and downside of REIT exposure.
**What Is a REIT?**
A REIT is a tax‑advantaged vehicle that develops, owns, and manages real‑estate assets. Most focus on high‑quality properties with lower operational risk. They operate as pass‑through entities, so earnings are distributed to shareholders as dividends, avoiding double taxation. Investors can gain diversified exposure through individual REIT shares or real‑estate ETFs.
**How REITs Generate Income**
Revenue comes mainly from tenant rent. Growth depends on occupancy rates and rent increases. REITs cover operating expenses, while investors provide equity capital in return for regular dividends. Publicly listed REIT shares trade like stocks or ETFs; non‑traded REITs have limited liquidity.
**Key Benefits**
1. **Tax Structure**
REITs are exempt from corporate income tax if they distribute at least 90 % of taxable income. Investors pay ordinary income tax on dividends, with a 20 % deduction available on qualified REIT income. Advisors should discuss the impact of holding REITs in taxable versus tax‑deferred accounts.
2. **Stable Dividends**
REITs rarely cut dividends, offering reliable income. Since 2000, average REIT yields have outpaced the 10‑year Treasury rate by roughly 1.25 % and the trend has held steady. Top performers for income seekers include Federal Realty, Realty Income, O’Reilly, Americold, Essex, and Ventas.
**Primary Risks**
1. **Lack of Economic Moats**
REITs typically lack durable competitive advantages. High capital intensity and the ability of supply to catch up to demand mean most REITs do not consistently outperform their cost of capital. Advisors should scrutinize price‑to‑fair‑value ratios and maintain a safety margin for uncertain prospects.
2. **Interest‑Rate Sensitivity**
Over the past 25 years, REIT prices have moved inversely to interest rates. Rising rates compress the spread between acquisition cap rates and debt costs, limiting growth potential. While most REIT debt is fixed and long‑dated, higher rates can erode returns. Monitoring rate forecasts and rotating income investors into safer assets when yields rise is prudent.
3. **Limited Inflation Hedge**
The belief that REITs thrive in inflationary periods stems largely from the 1970s‑early 1980s era of extreme inflation. From 2000 onward, there is no clear link between inflation and REIT performance. Inflation can raise expenses and interest rates, offsetting rent growth. Advisors should temper client expectations for inflation‑driven gains.
**Sector Outlook (2025‑2035)**
- **Healthcare REITs**
Senior housing occupancy is rebounding to pre‑pandemic levels. The aging baby‑boomer cohort should drive at least 3 % annual demand growth, outpacing supply for the next decade. Medical office leases offer steady 2.5 % escalators; life‑science growth is slowing but remains stable.
- **Hotel REITs**
Leisure travel has recovered, but business travel lags. Hotel revenue is likely to plateau below 2019 levels due to permanent loss of business travel. Upscale and luxury hotels have recently renovated, potentially boosting growth modestly.
- **Industrial REITs**
E‑commerce has spurred demand for warehouse space, but recent rent growth has weakened and vacancies have risen. Despite a high market valuation, net operating income growth is expected to continue, especially for leaders like Prologis.
- **Office REITs**
Remote work persists; office leasing remains below 2019 levels. New office construction is down 94 % from 2019, suggesting a challenging recovery. Supply constraints may eventually support a rebound.
- **Residential REITs**
The pandemic shift to suburban single‑family rentals has cooled. Net operating income growth is projected at 3‑5 % annually over the next decade.
- **Retail REITs**
Brick‑and‑mortar sales are still positive, even as 40 % of retail moves online. Retail REITs should continue to generate modest growth.
- **Self‑Storage REITs**
Historically strong, the sector’s growth has slowed since 2021. New lease rates are below previous averages, indicating downward pressure on future rent growth.
**Data and Research Resources**
Morningstar tracks 598 listed and 137 unlisted U.S. REITs (as of Nov. 7, 2025). Advisors can access performance, fair‑value metrics, key industry data, financial statements, portfolio holdings, and dividend history through the Morningstar platform. For a deeper dive, download the full U.S. REIT Landscape.
By understanding these fundamentals, advisors can better assess whether REITs fit a client’s income strategy, risk tolerance, and inflation expectations.
