Chart of the Week

The Real Estate sector underperformed the S&P 500 Index by 6.5% from June 15 (when we downgraded the sector to unfavorable) through September 22. Higher yields increase borrowing and refinancing costs, weaken the economics of property acquisition and development projects, and reduce the present value of future property cash flows. They also heighten competition from fixed-income investments, diminishing the relative appeal of real estate investment trust (REIT) dividends.

The chart illustrates these pressures, showing Real Estate’s relative performance against the S&P 500 Index alongside inverted long-term Treasury yields to highlight the sector’s negative relationship with rates.

Underlying fundamentals remain more resilient than recent sector performance suggests, supported by continued growth in funds from operations, net operating income, healthy occupancy levels, and rent growth. However, elevated interest rates remain a significant headwind. Higher financing costs, refinancing challenges, subdued transaction activity, and limited balance-sheet flexibility are likely to constrain growth and valuations. As a result, we maintain our unfavorable view on Real Estate and believe sustained relative outperformance remains unlikely.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

S&P 500 Real Estate Index comprises those companies included in the S&P 500 that are classified as members of the GICS Real Estate sector.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

An index is unmanaged and not available for direct investment.

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