Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Real estate sector

Real Estate Sector: Underperform

Real estate sector overview

Low interest rates can make dividend-paying equity real estate investment trusts (REITs) more attractive, a factor that has supported them in recent years but now appears to be lessening as rates tick higher. Apartment and office markets have been generally strong, supporting rents; however, supply is rising, which could pressure profitability. Also, an ongoing shift away from brick-and-mortar retailers could pressure mall REITs.

Market outlook for the real estate sector

The real estate group is dominated by equity REITs, entities that invest in physical property and typically receive rental income from their investments. One unique fact about REITs is they are required to pay out to shareholders at least 90% of their taxable income. This can make them an attractive investment in a low-interest-rate environment, as investors look for income. But with our belief that interest rates will continue to rise over the coming year, those investors could start to migrate back to fixed income investments. As a result of this and other factors, we continue to rate the sector at underperform.

There are other issues that concern us, as well. For instance, although apartment demand has been strong and rental rates have risen, the laws of supply and demand remain in force. We've seen the number of apartments being built rise over the past couple of years, leading to increased supply, which could start to moderate rental income gains. We've also seen some evidence, such as a survey from, that Millennials may be starting to move out of apartments and into houses. Finally, retail REITs could face a headwind in coming years, as department store sales have come under pressure and some major retailers have announced they are paring back the number of locations they operate. In fact, recently the Census Bureau reported that department store sales were flat over the year-ago period, while non-store retailers (online) rose a solid 10.1%.

For sure, the apartment and office markets have been generally strong, as rents in both areas have gone up over the past several years in much of the country. This is one of the most important things to consider when looking at individual REITs—whether they can maintain or extend their cash flow in order to sustain or increase their payouts. This area has also benefited from low interest rates in another way: cheap financing. REITs have been able to borrow money at low rates in order to increase their holdings and potentially their income. This is another concern for us, that their financing costs could increase in the near future as rates rise.

Factors that may affect the real estate sector

Positive factors for the real estate sector include:

  • Low interest rates: Low rates have enabled real estate investors to buy property with relatively "cheap" money, which provides the potential for greater income.
  • Improving economy: An improving U.S. economy typically helps the real estate area, as rental rates increase for apartments, retail and office buildings.
  • Apartment trends: Due to the financial crisis and housing crash, as well as demographic factors, demand for apartments has been strong, supporting rental rates and benefiting those companies that have a stake in that arena.
  • The recent change in the tax code could help make REITs more attractive in taxable accounts due to a change in the taxation of passive income.

Negative factors for the real estate sector include:

  • Continuation of rising interest rates: Higher rates would likely raise the cost of financing, and could make the yield provided by the group less attractive.
  • Apartment trends—part 2: This has been a positive factor but we may be at an inflection point, where supply starts to exceed demand and Millennials start to be more attracted to houses.
  • Changing consumer: There has been a move toward online shopping, away from brick-and-mortar stores, which could hurt certain mall-related investments as department stores pare back the number of locations.


Clients can see our top-rated stocks in the real estate sector.

Want to learn more about a specific sector?  Click on a link below for more information or visit Schwab Sector Views to see how they compare.

Consumer discretionary Consumer staples Energy
Financials Health care Industrials
Information technology Materials Real estate
Telecom Utilities

Talk to Us

  • Call Schwab anytime at 877-338-0192.
  • Talk to a Schwab Financial Consultant at your local branch.
Industrials Sector
Industrials Sector Rating: Marketperform
Telecommunication Services Sector Rating: Underperform
Telecommunication Services Sector

Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news.

Performance may be affected by risks associated with non-diversification, including investments in specific sectors. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

All expressions of opinion are subject to change without notice in reaction to shifting market and other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Companies in the real estate sector may be significantly affected by economic fluctuations; interest rates; supply and demand for apartments and office, retail or warehouse space; changing demographics; and other factors.


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.