Why REITs Are Set for a Renaissance in a Rate-Cutting World

The real estate investment trust (REIT) sector has long been a cornerstone of income-focused portfolios, but its recent performance has left investors scratching their heads. Despite robust earnings growth, REITs have underperformed broader equity markets, creating a compelling divergence between fundamentals and valuation. As central banks globally signal a shift toward rate cuts in 2025, this disconnect may soon resolve in favor of REITs, with companies like NNN REIT emerging as prime beneficiaries of a re-rating.

Earnings Growth vs. Stock Price Underperformance: A Tale of Two Metrics

According to Uniplan's report, REITs are projected to deliver earnings growth of 4-6% in 2025, driven by resilient demand in industrial and healthcare sectors and disciplined cost management. J.P. Morgan Research corroborates this, forecasting sector-wide earnings growth of around 3%, supported by stable fundamentals and improved capital efficiency. Yet, the MSCI U.S. REIT Index has lagged, with stock prices failing to reflect this optimism. The disconnect stems from macroeconomic headwinds, including sticky inflation and the Federal Reserve's reluctance to ease monetary policy, which have kept discount rates high and weighed on real estate valuations.

This earnings-valuation gap is particularly pronounced in sub-sectors like industrial and self-storage REITs, where occupancy rates and rental growth outpace market expectations. Conversely, office and cell tower REITs have struggled, highlighting the uneven nature of the sector's challenges. However, the broader trend suggests REITs are trading at a discount to their intrinsic value, with dividend yields averaging 4-6%-a stark contrast to the 1-2% yields of the S&P 500.

The Case for a Renaissance: Rate Cuts as a Catalyst

The key to unlocking REITs' potential lies in the trajectory of interest rates. Real estate is inherently sensitive to discount rates, as lower borrowing costs reduce the cost of capital and elevate asset values. With inflation showing signs of moderation and central banks hinting at rate cuts in 2025, the sector is poised for a re-rating. Uniplan estimates REITs could deliver total returns of 8-10% in 2025, with dividends accounting for roughly half of this return-a compelling proposition in a low-yield environment.

Moreover, REITs' balance sheets are increasingly resilient. NNN REIT, for instance, exemplifies this strength. In Q3 2025, the company reported a 1.2% year-over-year increase in core funds from operations (FFO) per share to $0.85, alongside a 7% annualized base rent growth to $912 million. Its occupancy rate, temporarily dipped to 97.5% due to asset turnover, is expected to rebound above 98% by year-end. Crucially, NNN maintains $1.4 billion in liquidity and an industry-leading average debt maturity of nearly 11 years, insulating it from refinancing risks.

NNN REIT: A Model of Stability and Income

NNN REIT's appeal extends beyond its operational metrics. With a dividend yield of 5.5% as of September 30, 2025, it offers one of the most attractive income propositions in the sector. The company has maintained a 36-year streak of dividend growth, a testament to its disciplined capital allocation and focus on long-term value. In a rate-cutting environment, such high-yield, stable-cash-flow assets are likely to outperform, as investors rotate into sectors with durable returns.

The company's portfolio further underscores its strategic positioning. Focused on industrial and retail properties in high-growth markets, NNN benefits from e-commerce tailwinds and limited new supply, which support rental growth.

Conclusion: A Re-Rating on the Horizon

The underperformance of REITs in 2023-2025 has created a unique buying opportunity. With earnings growth outpacing stock price gains and valuations trading at a discount to historical averages, the sector is primed for a re-rating as rate cuts materialize. NNN REIT, with its strong fundamentals, resilient balance sheet, and attractive yield, stands out as a compelling case study. For investors seeking income and capital appreciation, the coming months may mark the beginning of a REIT renaissance-one driven by the simple arithmetic of lower rates and undervalued assets.