Key Takeaways
- • The Vanguard Real Estate ETF, the largest real estate fund at $66 billion in assets, is down 7% over the past month and has averaged just 1% annually over five years, after losing 26% in 2022.
- • Real estate stocks are roughly 15% below their early-2022 highs, with a sharp rise in bond yields in the past month adding pressure, according to the article.
- • Kestra Investment Management has cut its real estate weighting to about 2% of portfolios, matching the S&P 500 weighting, after a modest overweight position bet on Federal Reserve rate cuts that did not materialize.
- • Hamilton Lane and Cohen & Steers argue that current valuations offer an attractive entry point, citing income, inflation protection, and healthy demand for office, retail, and multifamily properties.
- • Constrained new construction, with starts down and unlikely to rebound given high financing costs, is cited as a supply-side support for property fundamentals.
Summary
Real estate has underperformed as interest rates have risen. Barron's notes that real estate stocks are down about 15% from their early-2022 highs, a period that preceded the rate increases that followed pandemic-era near-zero levels. A recent sharp rise in bond yields has added to the decline. The $66 billion Vanguard Real Estate ETF, the largest real estate fund, is down 7% over the past month and has returned an average of just 1% annually over five years, reflecting a 26% loss in 2022.
Kestra Investment Management illustrates the difficulty of timing the sector. Derek Schug, head of portfolio management at Kestra, said the firm had been modestly overweight real estate in late 2025 and early 2026, expecting Federal Reserve rate cuts. "That didn't work out," Schug said. Kestra's portfolios now hold roughly the same real estate weighting as the S&P 500, about 2%. Schug nonetheless described current valuations as attractive, while warning they could fall further if rates keep rising.
The contrarian case rests on several factors. Barron's reports that rising rates reflect a strong economy, which supports demand for real estate. Liz Bell, co-head of real estate at Hamilton Lane, described the asset class as "a hard asset that offers income and inflation protection," and a complement to stocks and bonds whose valuations she called harder to assess given AI's influence. Brian Cordes, head of the portfolio specialist group at Cohen & Steers, said fundamentals are healthy, with demand for high-quality office, retail, and multifamily properties rising in many markets. He noted that construction starts are down and unlikely to rebound given high financing costs, and said, "We see a really attractive entry point today."
Kestra Investment Management illustrates the difficulty of timing the sector. Derek Schug, head of portfolio management at Kestra, said the firm had been modestly overweight real estate in late 2025 and early 2026, expecting Federal Reserve rate cuts. "That didn't work out," Schug said. Kestra's portfolios now hold roughly the same real estate weighting as the S&P 500, about 2%. Schug nonetheless described current valuations as attractive, while warning they could fall further if rates keep rising.
The contrarian case rests on several factors. Barron's reports that rising rates reflect a strong economy, which supports demand for real estate. Liz Bell, co-head of real estate at Hamilton Lane, described the asset class as "a hard asset that offers income and inflation protection," and a complement to stocks and bonds whose valuations she called harder to assess given AI's influence. Brian Cordes, head of the portfolio specialist group at Cohen & Steers, said fundamentals are healthy, with demand for high-quality office, retail, and multifamily properties rising in many markets. He noted that construction starts are down and unlikely to rebound given high financing costs, and said, "We see a really attractive entry point today."
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