By Teresa Rivas

If real estate is all about three things -- location, location, location -- then real estate investment trusts have been in a bad place.

The real estate sector accounts for just 2% of the S&P 500 by market capitalization, the smallest of the 11 sectors, and has underperformed for the past decade. Although the State Street Real Estate Select Sector SPDR exchange-traded fund has rebounded and is up just over 10% since the start of 2026, it's gained an anemic 5% over the past five years, a period when the S&P is up some 75% and the State Street Technology Select Sector SPDR ETF has soared nearly 150%. In fact, State Street Real Estate Select Sector SPDR rose less than 30% from the end of 2015 to the end of 2025.

Going further back, to the last 20-year period or more, paints a more comforting picture, but it's one that might be entirely irrelevant now.

That's because "a structural reordering that began around 2014 and has been continuing ever since, with no indication of reverting," writes BTIG analyst Michael Gorman. "Real estate investment trusts are not one market anymore, they are three: an elite tier of roughly 10 names commanding an unprecedented share of sector market value and an all-time high valuation premium; a secondary tier of S&P 500 members that are above historical norms but losing ground to the elite group; and a large majority of 100+ names that are meaningfully disadvantaged on cost of capital."

It's little wonder then that investors haven't been very interested lately. Gorman thinks that generalist investors are more likely to buy into one or two names that are liquid and play into broader investing themes, like logistics or artificial intelligence.

This shift means that upward mobility within the sector is hard. Cheap stocks ultimately wind up being value traps, he warns, with the market demanding "a specific, durable, and demonstrable growth argument" to bid the stocks up to a higher multiple.

It also means there's something of a Magnificent 10 within the group, including Realty Income, which dominates net lease REITs, and Prologis, which commands one of the highest premiums. Overall, the top REITs are trading at roughly double the median multiple of the group, a gap that Gorman notes has only been seen previously in times of crisis.

Perhaps it isn't surprising then that Gorman's favorite picks within the sector are among the proven winners: He has Buy ratings on Prologis and InvenTrust Properties, with price targets of $160 and $32, respectively. Both are up more than 12% year to date.

The new normal in real estate means investors have to rethink their approach when moving money into the sector.

Write to Teresa Rivas at teresa.rivas@barrons.com

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May 08, 2026 13:28 ET (17:28 GMT)

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