Overview of REITs Have Under Performed for 25 Years. Is the Next Decade Different?
This BiggerPockets Money episode features Scott Trench and REIT analyst Yussi Escola discussing why REITs have lagged the broader stock market for much of the last 10–25 years, why Yussi believes many are now undervalued, and how investors should think about selecting individual REITs. The core message: broad REIT exposure has been weak, but the sector may offer strong opportunities today if investors are selective about valuation, leverage, and especially management quality.
Why REITs Have Underperformed
The recent bear market
- REITs entered a multi-year bear market in early 2022 when interest rates surged.
- Higher rates hurt sentiment, but REITs were not as fundamentally damaged as many feared because:
- Average REIT loan-to-value is relatively low, around 35%.
- Rental inflation helped cash flows and dividends continue to grow.
- Yussi says REITs have started recovering since late 2023, but the sector is still far behind the S&P 500 over the last several years.
Why the long-term chart looks so weak
- REITs have suffered several major shocks:
- The Great Financial Crisis
- Pandemic disruption
- Rising interest rates
- Sector-specific oversupply in some property types
- VNQ, the Vanguard real estate ETF, is not a pure REIT ETF; it also holds homebuilders, developers, and brokers, which can distort the picture.
- Over the very long run, however, REITs have historically been competitive with the broader market.
How Yussi Thinks About REIT Valuation
Net asset value matters most
- Yussi prefers comparing a REIT’s share price to the net asset value (NAV) of its real estate, net of debt.
- His argument: REITs should usually trade at a small premium to NAV because they offer:
- Liquidity
- Diversification
- Professional management
- Economies of scale
- Limited liability
Today’s setup
- Many REITs are now trading at 20% to 50% discounts to the value of their underlying real estate.
- This has triggered significant M&A activity, with private equity firms like:
- Blackstone
- Brookfield
- KKR
- Blue Owl
- These buyers are often paying premiums of 20%–30% and still finding the deals attractive.
Why NAV is hard, but still useful
- Public REIT balance sheets use historical cost accounting, not fair market value.
- Investors often must estimate NAV themselves by:
- Estimating cap rates
- Forecasting NOI
- Deducting debt
- It is not an exact science, but Yussi argues you usually only need a reasonable range to know whether a REIT is meaningfully undervalued.
The Most Important REIT Filter: Management
Internally managed vs. externally managed
- Yussi says this is one of the most important distinctions in REIT investing.
- Externally managed REITs:
- Outsource management to a third party
- Often suffer from conflicts of interest
- May prioritize fee growth and empire building
- Internally managed REITs:
- Align management with shareholders better
- Tend to have better economies of scale
- Have historically outperformed externally managed REITs
Why this matters
- In Yussi’s view, a REIT can have:
- Great assets
- Strong balance sheet
- Attractive valuation
- But if management is conflicted, the investment can still perform poorly.
- He argues management quality is just as important in REITs as it is in private real estate.
Examples mentioned
- EastGroup Properties: cited as a strong industrial REIT with aligned management.
- BSR REIT: discussed as a residential REIT with concentrated markets and shareholder-friendly moves.
- Branicks: used as an example of a troubled, complex, overleveraged REIT-like situation.
Sector-by-Sector Outlook
Multifamily
- Yussi agrees the sector has been weak due to oversupply and rent stagnation.
- He notes that many investors expected recovery in:
- 2025
- then 2026
- then 2027
- But the recovery keeps getting pushed out as supply and weak demand persist.
- Still, he sees some value in well-managed multifamily REITs trading below NAV.
Office
- Yussi is not broadly bullish on generic office.
- He is more constructive on:
- Class A buildings
- Well-located assets
- Supply-constrained markets
- He agrees the gap between top-quality office and weaker office is widening.
- Main risk: distressed properties could be acquired cheaply and renovated, creating new competition.
- AI could be:
- Near-term negative for office
- Long-term positive if it drives more business formation and demand for space
Data centers
- Yussi acknowledges they have benefited from the AI boom.
- He is cautious because the terminal value of data centers is uncertain.
- His concern: rapid technology change could make today’s data centers obsolete or less valuable in the future.
- He sees them as more speculative than traditional real estate.
Service-oriented retail
- One of Yussi’s favorite current sectors.
- Examples:
- Grocery-anchored strip centers
- Essential-service retail
- Why he likes it:
- Retail supply has been constrained for years
- Occupancy and rents are improving
- Many of these REITs still trade at attractive valuations
- He mentioned:
- Kite Realty Group
- Kimco Realty
- Whitestone REIT as a previous successful buyout
Cell towers
- Another favored area.
- Yussi believes rising data usage from:
- AI tools
- Autonomous vehicles
- Smart cities
- Robotics
- will likely require more network infrastructure and increase long-term demand for cell towers.
Leverage and Capital Structure
Conservative REIT balance sheets are a plus
- Compared with many private real estate investors, public REITs today are often relatively conservative.
- Yussi says many have loan-to-value ratios around 30%–40%.
- His view: low leverage has helped REITs survive downturns and capitalize on distressed buying opportunities.
Why some REITs still fail
- Overleveraged REITs can become value traps.
- He used the example of Branicks, which ended up in a complex debt restructuring after bad timing and too much leverage.
Key Takeaways
- Broad REIT indexes have lagged badly, but that does not mean all REITs are bad investments.
- The sector looks more attractive when you focus on:
- Discount to NAV
- Management alignment
- Lower leverage
- Property type and geography
- Yussi’s main message: REIT investing is not passive if you want strong returns.
- Like private real estate, it rewards education, selectivity, and a willingness to do the work.
Practical Investor Checklist
If you’re evaluating a REIT, look for:
- Internal management
- Insider ownership / skin in the game
- Conservative leverage
- Clear estimate of NAV
- Evidence the assets are high quality and well located
- A shareholder-friendly capital allocation track record
- Reasonable exposure to property types with durable demand
Be cautious with:
- Externally managed structures
- Highly leveraged balance sheets
- Generic office exposure
- Data center plays if you’re uncomfortable with technology risk
- “Buy the whole sector” approaches that include weak or conflicted operators
Where to Find Yussi Escola
- Substack: High Yield Landlord
- Book: The REIT Advantage
- He also shares his portfolio and REIT research through his newsletter and analysis work.
Final Thought
Scott and Yussi conclude that REITs, like private real estate, are not a magic passive shortcut. The best outcomes come from selective underwriting, strong management, and choosing sectors with favorable supply-demand dynamics. The broad sector may have disappointed investors for years, but Yussi argues that the next decade could look very different for those who pick carefully.