The State Of REITs: September 2025 Edition

REITs delivered a strong August rebound, gaining 5.48% and outperforming broader market indices, with small and mid-cap REITs leading the recovery. This performance coincided with a significant downward revision of 911,000 jobs to nonfarm payrolls and softer inflation data, which has solidified market expectations for a September Fed rate cut (100% probability) and multiple cuts by year-end. With the average REIT trading at a 14.5x FFO multiple and a 12.7% discount to NAV, the impending rate cutting cycle is expected to provide a substantial tailwind for the sector, creating potential alpha opportunities in individual, attractively valued securities despite varied performance across property types and market caps.

Analysis

The REIT sector demonstrated a robust recovery in August, with the average REIT returning +5.48% and outperforming broader market indices like the S&P 500 (+2.0%). This rebound was led by small-cap (+7.52%) and mid-cap (+7.13%) REITs, which narrowed the valuation gap with their large-cap peers; the premium for large-cap 2025 FFO multiples fell slightly but remains significant at 28.8%. Performance across property types was highly dispersed: Malls (+12.70%) and Industrial (+8.68%) excelled, while Infrastructure (-9.64%) and Data Centers (-3.14%) significantly underperformed. The primary catalyst for this sector-wide rally appears to be macroeconomic, specifically a major downward revision of 911,000 nonfarm payroll jobs and moderating PPI inflation, which has solidified market expectations for a Federal Reserve rate-cutting cycle beginning in September. FedWatch odds indicate a 100% probability of a September cut and over 80% odds of at least 75 basis points in cuts by year-end. Despite this favorable interest rate outlook, underlying economic risks persist, evidenced by corporate bankruptcies reaching their highest level since 2010. Specific company events highlight this dispersion, with Plymouth Industrial REIT (PLYM) soaring 51.52% on a takeover proposal, while Wheeler REIT (WHLR) collapsed -48.09%, underscoring the critical importance of individual security selection within a sector poised for a macro tailwind but still facing idiosyncratic risks and varied fundamentals.

Key Decisions for Investors

• Given the high probability of a Fed rate-cutting cycle, investors should consider increasing allocation to the rate-sensitive REIT sector to capitalize on potential multiple expansion from lower interest rates.
• Focus on undervalued small and mid-cap REITs, which trade at a substantial discount to NAV (-21.89% and -6.74% respectively) and FFO multiples compared to large-caps, offering greater potential for valuation re-rating.
• Employ a selective, security-focused approach rather than broad index exposure, prioritizing property types with strong recent performance and secular tailwinds like Industrial and Health Care, while exercising caution with sectors facing headwinds, such as Hotels and those exposed to rising corporate bankruptcies.
• Monitor for M&A catalysts, as the unsolicited bid for PLYM suggests that firms trading at significant NAV discounts could become acquisition targets, providing a potential source of alpha.