3 Leading REITs to Consider Purchasing as Interest Rates Decline

Real estate investment trusts (REITs), which are companies that own, manage, or finance properties that generate income, often deliver stronger performance when interest rates decline.

These investment structures are required to distribute 90% of their taxable earnings as dividends, making their yields more attractive when returns on Treasuries and corporate bonds decrease. Their market values can climb because the 10-year Treasury yield is commonly used to discount future REIT cash flows; as this benchmark drops, REIT cash flows become more valuable, lifting their valuations. Additionally, lower interest rates reduce borrowing costs, which is beneficial since REITs typically rely on long-term debt that can be refinanced at better rates, increasing their profitability.

The superior performance of REITs is evident in the returns of the Vanguard Real Estate ETF ( VNQ -0.29%) during the low-interest period from 2008 to 2015. This fund, which broadly tracks U.S. equity REITs, achieved a 195% return from December 2008 to December 2015, compared to a 126% return for the S&P 500 ( ^GSPC -0.50%) over the same timeframe.

However, while the sector as a whole tends to benefit from falling rates, not every REIT reacts the same way. Different segments within the REIT market may respond uniquely to another period of low-cost capital. Below are three REIT opportunities that investors may want to explore.

1. Realty Income

Established in 1969, Realty Income ( O -0.34%) supplies real estate capital to top global businesses and manages a portfolio of 15,600 properties. Its tenants include companies such as 7-Eleven, Lowe's, Chipotle, Sainsbury's, and Treasury Wine Estates.

Known as "The Monthly Dividend Company," Realty Income has increased its monthly dividend every year since its 1994 IPO. Over the past 31 years, the company has grown its dividend at an average annual rate of 4.2%. Its current dividend yield stands at 5.3%, which is nearly five times higher than the S&P 500 average.

This impressive 31-year record is partly due to its high occupancy rate of 98.6% and an average remaining lease term of about nine years, indicating that most properties in its portfolio are expected to generate rental income for nearly a decade. This is at the higher end of the typical lease duration for commercial and residential real estate, which usually ranges from two to 10 years.

The company has delivered positive total operational returns every year since its public listing in 1994, including during the 2008 housing downturn and the subsequent financial crisis. Still, management highlighted "ongoing cash flow challenges from elevated interest rates" during its August earnings call.

Realty Income's solid fundamentals are reflected in its ability to consistently raise dividends for over three decades, weathering various market cycles. With $110 million in floating-rate credit facility debt coming due in May 2026, a drop in rates would benefit the company by enabling refinancing at more attractive terms.

2. Prologis

Prologis ( PLD 0.21%) is a global powerhouse in logistics real estate, focusing on markets with high growth and significant entry barriers. Its portfolio spans 1.3 billion square feet across 5,895 buildings, serving 6,500 clients. Notable tenants include Coca-Cola, Amazon, Walmart, Best Buy, Samsung, UPS, and Staples.

The company maintains strong diversification, with its top 10 tenants accounting for just 14% of its total portfolio. Since 2019, its dividend has grown by 90%, outpacing other logistics REITs, all REITs in the S&P 500, and the average dividend growth of the S&P 500 itself.

A significant growth driver for Prologis is the increasing demand for data centers in the era of artificial intelligence (AI). By 2030, up to $7 trillion may be needed for data center investments to meet the rising need for computing power.

Although Prologis does not break out revenue from data center projects, it launched a $25 billion data center division in 2024 to capitalize on the booming digital infrastructure and AI market. Often referred to as "the landlord of data center landlords," Prologis owns strategic industrial properties near key power infrastructure. The company has secured 1.4 gigawatts (GW) of data center power capacity, with another 2.2 GW in advanced planning, representing nearly 40% of the 10 GW it aims to develop to support the AI boom.

Prologis currently provides a 3.5% yield, which is significantly higher than the S&P 500 average of 1.2%.

3. Vanguard Real Estate ETF

The previously mentioned Vanguard Real Estate Index Fund ETF gives investors access to more than 150 REITs and real estate-related stocks. Designed to deliver substantial income and moderate long-term capital growth, the fund mirrors the performance of the MSCI U.S. Investable Market Real Estate 25/50 Index.

This ETF offers a yield of 3.76%, which is over three times the average yield of the S&P 500. As a passively managed fund, it boasts a very low expense ratio of 0.13%, compared to the 0.56% average for exchange-traded funds (ETFs).

So far this year, the fund has returned 5.65%, exactly in line with its benchmark, and its average annual return of 6.4% matches the performance of its REIT-focused index. Since its launch in September 2004, the ETF has produced an average annual return of 7.55%. Notably, it has a track record of outperforming the market during periods of low interest rates, having delivered nearly 200% returns from December 2008 to December 2015, the last extended period of cheap borrowing costs.

For investors seeking steady income in a renewed era of low interest rates, these three REIT-focused options are worth considering.