Undervalued Real Estate Investment Trusts (REITs) in a Rising Interest Rate Environment

In a market defined by rising interest rates and economic uncertainty, investors are increasingly scrutinizing Real Estate Investment Trusts (REITs) for their ability to deliver stable yields and operational resilience. While REITs traditionally face headwinds in higher-rate environments due to increased borrowing costs and valuation pressures, certain subsectors—namely data center and healthcare REITs—stand out as compelling opportunities. These sectors combine attractive valuations, strong dividend yields, and structural tailwinds that position them to outperform despite macroeconomic challenges.

Data Center REITs: Anchored by Digital Infrastructure Demand

Data center REITs have demonstrated remarkable resilience, with total returns averaging 21.95% over the last five years7 ways AI is transforming healthcare^[2]. This performance is driven by the explosive growth of cloud computing, e-commerce, and the "internet of things," which have created a near-insatiable demand for secure, high-capacity infrastructure. According to a report by the World Economic Forum, global data center and cloud IP traffic is projected to triple by 2025 at a 25% compound annual growth rate (CAGR), underscoring the sector's long-term potentialIn charts: 7 global shifts defining 2025 so far^[1].

The operational strength of data center REITs lies in their long-term leases and high-quality tenants, often Fortune 500 technology firms. These contracts provide predictable cash flows and reduce sensitivity to short-term economic cycles. Additionally, the energy demands of data centers are increasingly being met with renewable sources, enhancing their sustainability profiles and aligning with global decarbonization trendsIn charts: 7 global shifts defining 2025 so far^[1]. Despite rising interest rates, the sector's low price-to-funds from operations (P/FFO) ratios suggest undervaluation, making them attractive for income-focused investors seeking growth.

Healthcare REITs: Stability in an Aging World

Healthcare REITs have also shown robust performance, with average total returns of 44.14% over the last three years7 ways AI is transforming healthcare^[2]. The aging global population and the rising prevalence of chronic diseases ensure consistent demand for medical facilities, senior housing, and outpatient centers. This demand is further amplified by the integration of artificial intelligence (AI) in healthcare, which is improving diagnostic accuracy and operational efficiency7 ways AI is transforming healthcare^[2].

While skilled nursing facilities within healthcare REITs have faced temporary challenges from regulatory shifts and labor costs, the broader sector remains resilient. Healthcare services are considered essential, with demand remaining stable even during economic downturns. Moreover, AI's potential to address global healthcare worker shortages adds a long-term growth catalyst7 ways AI is transforming healthcare^[2]. Healthcare REITs typically trade at discounts to their net asset values (NAVs), reflecting market skepticism about near-term challenges while overlooking their structural advantages.

Strategic Considerations for Investors

In a rising rate environment, investors should prioritize REITs with strong balance sheets, diversified tenant bases, and exposure to secular growth trends. Data center and healthcare REITs meet these criteria, offering yields exceeding 4% in many cases and P/FFO multiples below industry averages. Their operational resilience—rooted in long-term leases and inelastic demand—provides a buffer against interest rate volatility.

Conclusion

While the broader REIT market faces headwinds from higher borrowing costs, data center and healthcare REITs present a unique combination of defensive qualities and growth potential. Their alignment with technological and demographic megatrends, coupled with attractive valuations, makes them well-suited for investors seeking income and capital appreciation in an uncertain macroeconomic landscape. As the AI revolution and aging population continue to reshape global demand, these subsectors are poised to deliver outsized returns.