The Surprising Case for Investing in Real Estate Now -- Barrons.com

Low valuations and strong fundamentals in subsectors like senior housing and data centers argue for a selective approach. By Amey Stone It's a basic fact of real estate investing that rising interest rates are bad for property prices. The same goes for real estate stocks. They're down about 15% from their highs of early 2022 -- before interest rates started rising from pandemic-induced near-zero levels.

The sharp rise in bond yields in the past month added to the pain. The largest real estate fund, the $66 billion Vanguard Real Estate exchange-traded fund, is down 7% in that time. Its five-year average annual return is just 1%, thanks mainly to a brutal 2022, when it lost 26%. "I love current real estate valuations, but those valuations can get much cheaper if rates continue to go up," says Derek Schug, head of portfolio management at Kestra Investment Management.

Late last year and into early 2026, investors expected the Federal Reserve to cut interest rates, and Kestra was modestly overweight real estate in its portfolios. "That didn't work out," says Schug. Now, Kestra portfolios have about the same real estate weighting as the S&P 500 index -- just 2%. So, here's the contrarian case for buying now anyway: Rates are rising due to a strong economy, which is fueling demand for real estate.

Real estate also holds the promise of relative stability. "It is a hard asset that offers income and inflation protection," says Liz Bell, co-head of real estate at investment firm Hamilton Lane. " Real estate fundamentals are healthy, says Brian Cordes, head of the portfolio specialist group at investment firm Cohen & Steers. Demand for high-quality properties in many markets is up -- office, retail, and multifamily homes.

Construction starts are down and unlikely to rebound, given the high cost of financing. "We see a really attractive entry point today," says Cordes. S. real estate investment trusts, but the firm launched a real estate ETF in February of last year, Cohen & Steers Real Estate Active, which includes non-REIT and international stocks.

Both funds are up 6% year to date. An actively managed fund makes sense today. If these higher rates are "the new normal, that will slow things down for sure," says Mike Acton, head of research at AEW, a global real estate investment manager. "That means being more selective and judicious in what you're investing in.

" According to Morningstar, the largest active real estate ETF is Dimensional Global Real Estate, a clone of Dimensional Fund Advisor's older mutual fund, DFA Global Real Estate Securities. ALPS Active REIT ETF was a top performer in the past year with a 10% gain. Its top holdings include Welltower, a senior housing REIT, and Equinix, a data-center REIT. Acton's firm is emphasizing two areas.

One is senior housing. "That's a demographic story that is very easy for people to understand," he says. The other area is data centers, a major part of the tech story. Some investors have dialed back holdings related to data centers because of high prices, including Cohen & Steers.

Now, the firm is more bullish on areas that have been beaten down, such as cell towers and single-family rental REITs, says Cordes. He's also a fan of senior housing. Kestra's Schug mentions investing in land as a related opportunity. The Horizon Kinetics Inflation Beneficiaries ETF is an option.

"It's not a REIT, but it's a creative way to invest in real estate and, given inflation and scarcity of land, it should do well," he says. Greg Friedman, CEO of real estate investment firm Peachtree Group, is bullish on the hospitality sector and notes the lack of new supply and the fact that young adults today love to travel, creating demand. His firm is developing hotels in Dallas and Austin, Texas. Pressures are building in pockets of real estate lending due to higher rates, creating opportunities for sophisticated investors to invest in private real estate funds that make and buy loans.

These funds typically have high minimums, restrictions on withdrawals, and are sold through financial advisors. "Senior debt positions secured by real estate are very attractive," says Friedman. Investment firms can buy loans at a discount, and they either earn attractive yields or, in the event of default, may end up owning the asset, he says. Credit investments can be safer than equity because lenders get paid ahead of stockholders in a restructuring.

Hamilton Lane's Bell says her firm is also buying so-called "secondaries" -- loans that other private credit investors are willing to sell at a discount. com This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal. (END) Dow Jones Newswires October 09, 2026 03:00 ET (07:00 GMT) Copyright (c) 2026 Dow Jones & Company, Inc.

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