Key Takeaways
- Rising interest rates, which analysts say normally dampen real estate stocks, haven’t gotten in the way this year, as strong fundamentals support REITs across the board.
- AI-related demand has boosted data center REITs, though Morningstar analysts cite risks to the group’s long-term prospects.
- Other REITs, such as healthcare and hospitality, are returning to steadier growth, with a few key names remaining undervalued by Morningstar’s measure.
On paper, this should be a bad year for real estate stocks, what with rising interest rates. But instead, real estate investment trusts are solidly outperforming the overall stock market, and the data center boom has been a key driver. That said, the gains among income-paying real estate stocks have been broad-based.
Data center REITs Equinix EQIX and Digital Realty DLR have been among the leading real estate stocks this year. Elsewhere, healthcare, hospitality, and retail REITs have also outperformed amid improving fundamentals across traditional property sectors. These include Host Hotels and Resorts HST, Welltower WELL, and Simon Property Group SPG.
The Morningstar US Real Estate Index has climbed 16.4% in 2026 through July 28, while the broader market has gained 9.8% as measured by the Morningstar US Total Market Index. The Real Estate Index is on track for its best gains since 2021, and if sustained, it would be the index’s first year of outperformance in more than a decade.
For REITs of almost all kinds, “Earnings growth momentum seems to be a main driver of individual [REITs] performance,” says Morningstar senior equity analyst Kevin Brown. “Valuations have also improved significantly since the beginning of the year.”
Rising Interest Rates Haven’t Hampered REITs This Year
The relationship between interest rates and REITs is twofold: Higher rates raise the cost of financing REITs, and dividend yields look less compelling to investors relative to rising long-term Treasuries. Historically, when rates rise, real estate stocks have done poorly. This year, though, that hasn’t been the case.
10-year Treasury yields have risen to 4.6% from 4.2% in January, while REITs are having their best run in years. There are other factors at play. Brown says that over the past year, interest rate moves “have explained about 40% of performance.” In 2026, the sector’s outperformance has mainly come from individual REITs and strong fundamentals.
Data Center REITs Shine Amid the AI Infrastructure Boom
Part of REITs’ turnaround comes from demand for digital infrastructure. Amid immense growth in AI-related computer hardware and the power behind it, data center REITs have benefited, driving the Real Estate Index higher. “AI is the biggest thing that has happened in the industry since the internet,” says Morningstar equity analyst Martin Szumski.
This year, data center REITs Equinix, Digital Realty, and Iron Mountain IRM together contributed roughly 27.8% of the sector’s total returns through July 28. In 2025, they were the sector’s main detractors, reducing returns by 2 percentage points.
Data center REITs have run up in 2026 thanks mainly to inference loads—the energy used when users query models that have already been trained. “There are two flavors of data centers that have popped up with AI,” Szumski says. “The first is training. Model companies like OpenAI and Anthropic have built their own data centers solely to create the core foundational models that everyone uses.” The physical location of training-focused data centers is less important than for centers required to use finished models.
“Eventually, the hyperscalers and frontier model builders stopped looking at just the training side and focused more on inference,” Szumski says. Inference-focused data centers are needed for day-to-day interactions with models, so for reasons of latency and security, it’s beneficial for them to be near users in places like big cities. “When a customer goes to ChatGPT and types in a prompt, the fastest way to serve them is getting them as close to their data as possible,” Szumski explains. “For inference, the data centers owned by Digital Realty and Equinix are really important because they are where the customers live.”
Szumski says Equinix and Digital Realty’s advantage is difficult to replicate: “In the areas where the most customers are, there’s not really all that much land left, and there’s not a ton of power available. If you have capacity in these areas, as Equinix and Digital Realty do, you can charge a premium. There’s a ton of demand for data centers and not a ton of available supply right now.” He says both investor sentiment and company financials have been improving. Right now, “the only way to get data center space in places like Virginia and Chicago is to go through Equinix and Digital Realty.”
The main risk is that hyperscalers and AI companies will eventually build their own inference-focused data centers and rely less on REITs. “Half the data centers that were supposed to be built this year have either not started construction or been delayed,” Szumski says. “That’s good for Equinix and Digital Realty, for now.” He expects a slowdown in customer demand for data center REITs in 2028 or 2029.
Another key risk is exactly how long overall AI demand could last, according to Morningstar’s Brown, who doesn’t see data centers as real estate’s “best or highest growth story” in the long term. “The opportunities and risks are all about AI and tech demand and how volatile that can potentially be, which none of the other REIT sectors are exposed to in nearly the same way,” he says. “Demand for data centers can spike and crash faster than demand for office space and housing.”
REITs of All Kinds Have Risen in 2026
Other REITs have also done well this year. At the industry level, healthcare REITs were the leader, contributing 4.8 percentage points, or 30.4%, to the US Real Estate Index’s year-to-date gain of 16.4%. Next came specialty REITs (which include Equinix and Digital Realty), contributing 3.9 points, or 15.9%. Retail REITs contributed 3.5 points, industrial REITs contributed 3.4 points, and residential REITs contributed 0.9 points.
These subsectors are seen experiencing far healthier trends after recovering from pandemic-era capacity setbacks, and they’re on track for a period of stable growth, according to Morningstar’s Brown.
At the individual stock level, Welltower, a healthcare infrastructure REIT, is the index’s top contributor so far in 2026 with its gain of 32.1%. That said, its strong performance “can’t continue forever,” as some REITs fall in and out of patterns of consistent growth on an annual basis. Brown explains that senior living facility developer Healthpeak Properties DOC has gained 47.4% for the year, but it was previously disrupted by the Trump administration’s research funding cuts last year. Since then, it’s picked up with improving occupancy rates this year.
Brown highlights Simon Property Group SPG, the largest shopping mall company, which has returned 30.7% in the year to date. Retailers “are doing better than anticipated,” he adds, and Simon Property mostly benefits from owning stakes in retail brands, as well as occupancy rent.
However, while these stocks have topped the Real Estate Index in returns, Brown sees them as overvalued growth stories that “could start coming down.” His top REIT picks are Park Hotels & Resorts PK (up 51.3% this year) due to growth expectations following a major project completion, Invitation Homes INVH (up 10.5%) on anticipated net operating income growth helped by improving occupancy and lower expenses, and Kilroy Realty KRC (up 7.0%) because of improving fundamentals.
