Why Mortgage REITs Are Poised for a Strong 2026 Outperformance

The real estate investment trust (REIT) sector, particularly mortgage REITs, has long been a barometer of both economic resilience and structural transformation. As we approach 2026, the confluence of valuation convergence, macroeconomic tailwinds, and sector-specific structural demand suggests that mortgage REITs are uniquely positioned to outperform. This analysis examines the forces driving this outlook, drawing on recent data and forward-looking projections.

Valuation Convergence: A Narrowing Gap

The valuation gap between public and private real estate markets has historically been a persistent feature of the commercial real estate (CRE) sector. However, 2025 has marked a turning point. According to a report by J.P. Morgan Research, the return of capital market activity and improved liquidity have begun to close this gap, with mortgage REITs benefiting from a more favorable funding environment. This trend is particularly evident in the performance of publicly traded commercial mortgage REITs like Blackstone Real Estate Income Trust (BREIT), which delivered a +1.65% net return in Q3 2025 and a year-to-date gain of +5.6%. BREIT's strategic focus on high-conviction sectors-such as rental housing, industrial, and data centers-alongside its concentration in Sunbelt markets, underscores the sector's alignment with demographic and economic shifts.

The broader industry is also showing signs of normalization. After a period of subdued activity in 2023 and 2024, mortgage securitizations increased by 11% in Q2 2025 compared to the same period in 2024, driven by a modest decline in mortgage rates. This suggests that the market is recalibrating, with mortgage REITs increasingly viewed as a viable vehicle for accessing the sector's growth potential.

Macroeconomic Tailwinds: A Soft Landing Scenario

The U.S. economy's trajectory toward a "soft landing"-characterized by steady GDP growth and manageable inflation-provides a favorable backdrop for mortgage REITs. As noted in a 2025 outlook by PGIM, this environment supports commercial real estate and, by extension, REITs, as investors seek assets that balance yield and stability.

Interest rate dynamics further reinforce this case. While mortgage rates remain elevated, projections indicate a gradual decline into 2026. Realtor.com forecasts an average of 6.3% for mortgage rates in 2026, down from 6.6% in 2025. This reduction, though modest, is expected to improve affordability and stimulate refinancing activity, which directly benefits mortgage REITs. Additionally, the Federal Reserve's anticipated easing of monetary policy could amplify these effects, reducing borrowing costs and enhancing the sector's leverage capacity.

Structural Demand: Demographics and Housing Market Normalization

Beyond macroeconomic factors, structural demand trends are reshaping the housing market. The demographic bulge of nearly 52 million Americans in their 30s-a cohort historically associated with homeownership-is driving organic demand for housing. This cohort's life events-marriage, children, and job relocations-are increasingly prioritized over rate optimization, creating a steady, if unspectacular, lift in market activity.

Inventory levels, which have long constrained market balance, are also showing signs of improvement. For-sale listings are projected to rise by nearly 9% in 2026 compared to 2025, albeit still below historical averages. This gradual normalization is particularly beneficial for residential REITs, which have faced headwinds from declining residential unit completions (down over 25% year-over-year). As supply constraints ease and leasing demand remains robust, residential REITs are likely to see improved fundamentals.

Conclusion: A Convergence of Forces

The case for mortgage REITs in 2026 rests on the interplay of three forces: valuation convergence, macroeconomic stability, and structural demand. These factors collectively suggest that the sector is transitioning from a period of adjustment to one of renewed growth. While risks remain-such as regional disparities in affordability and inventory recovery-the long-term outlook is compelling. Investors who recognize this convergence may find mortgage REITs to be a strategic allocation in a diversified portfolio.