Editor’s Note: Welcome back to our prediction series with Brad Thomas. Over the next few days, we’ll talk with Brad about his biggest takeaways from 2025 and ask what he’s looking forward to next year. Today, we discuss real estate investment trusts (“REITs”) – the good, the bad, and the messy.
Van Bryan (VB): Brad, real estate is a specialty of yours. You’ve literally written the book on real estate investing. As we’re speaking, the S&P 500 Real Estate Sector is underperforming the broader index. What do you make of this underperformance?
Brad Thomas (BT): Well, there’s a major caveat there that’s worth understanding. And that is that the S&P Real Estate Sector – like the S&P itself – is market cap-weighted. That simply means the larger companies make up more of the sector weighting. Right now, about 40% of the S&P’s weighting is to just the top 10 companies, and almost all of them are tech stocks.
It’s even more concentrated in the Real Estate Sector. The top five companies make up about 40% of that sector’s weighting. Those would be Welltower (WELL), Prologis (PLD), American Tower (AMT), Equinix (EQIX), and Simon Property (SPG).
And so, you have to wonder if the performance of a handful of companies can really tell you how commercial real estate, in general, is doing. In reality, it’s just not that simple.
Commercial real estate is not some monolith. You have to drill down into the various property sectors and sub-sectors. And when you do that, you see that some of it is good, some is bad, and some is messy right now.
VB: Let’s start with the bad. What property sectors are struggling right now?
BT: One really ugly sector right now is life sciences. These are typically lab facilities leased by pharmaceutical and biotechnology companies. And the sector has been dealing with a really difficult supply/demand imbalance in recent years.
During COVID, there was something of a land rush for life sciences properties, which made sense. The world was dealing with a pandemic. But the message that sent to developers was that they needed to build new supply. At the peak in 2023, the construction pipeline for this industry was 17% of existing inventory, which is really astounding.
The only problem is that they overbuilt, which happens almost every time in situations like these. And around the same time, the urgency around COVID began to fade away. Interest rates also began to rise in 2022. That put pressure on venture capital funding for biotech startups. As a result, demand for these properties subsided.
So, that combination of massive new supply meeting waning demand has created a really ugly picture in life sciences. One of the hardest hit is Alexandria Real Estate (ARE). This is a “pure play” REIT that specializes in life sciences properties. And shares are down about 53% this year.
To be clear, I have a high opinion of Alexandria’s management. The company is very good at what it does. But even the best management in the world can only do so much when you have market dynamics like these. I predicted correctly that management would be forced to cut the dividend, which it did by about 45% earlier this month. I actually spoke with Alexandria’s CEO earlier this month to talk about what’s going on with the company.
Now, with all that said, this might be great news for value-oriented investors. Alexandria now trades for around 7.3 times adjusted funds from operations. Historically, the company has traded for around 20 times. That seems dirt cheap for a company of Alexandria’s caliber.
I have no idea if shares have found a bottom here. But if investors are willing to ride out some volatility and uncertainty, Alexandria could be an interesting option.
VB: What other troubled sectors are you seeing?
BT: One area that comes to mind is hotels. The sector is down about 7.8% so far this year. You know, I’ve never been a huge fan of the hotel sector. I’ve been upfront about the fact that, in the 2000s, I had a bad business partner that went way too heavy on hotels. And I experienced a devastating loss of principal as a result.
But, that personal experience aside, hotels have just never been a top-performing sector. Even over the last 20 years or so, lodging just always ends up at the lower end of the performance range. A big part of that is because hotels are so closely tied to the economic cycles. During economic contractions, business travel slows down. People take fewer vacations. And so, lodging underperforms. You end up with lumpy performance over long stretches of time.
I think there are some macro headwinds out there for lodging. The jobs market is pretty sluggish. We’re seeing credit-card debt rise. Loan defaults are rising. If we do move into a recession, then hotels just aren’t where you want to be. They always underperform.
Staying with that theme, shopping centers have been underwhelming this year. That sector is down about 7% year to date. If you do enter that sector, it’s worth looking for grocery-store anchored properties. Because those perform well in any market condition. Most folks go to the grocery store at least once a week.
Another sector that not many people know about is cold storage. These would be climate-controlled facilities for food storage before those items end up on grocery-store shelves. The two biggest players in that space are Americold (COLD) and Lineage (LINE). Those are both down about 40% or so this year. Some of the headwinds here have been inflation and reduction of government benefits.
But unlike hotels, I actually think there could be some opportunities for REIT investors, and private equity investors, in cold storage.
VB: What makes you say that?
BT: I really like property sectors that provide services that are in demand no matter where we are in the economic cycle. No matter the economy, everybody has to eat. And so, you always have demand for these cold-storage facilities.
And when I look at Americold and Lineage, these were REITs that were beloved just a few years ago. And because of their fall, they’re paying very generous dividend yields, which appear to be pretty safe based on their payout ratios. Both are trading well below their historical valuations. If this sector can work out its difficulties, a combination of dividend payments and multiple expansion could set investors up for high, double-digit returns over the next 12 months.
If I had to pick one of the two, it would be Americold. The company trades for less than half of its historical multiple. It’s around 10 times adjusted funds from operations compared to 25 times, historically. It offers a dividend yield north of 7% with a payout ratio that should keep that dividend coming in.
So, to sum things up, I’d say hotels and lodging are worth avoiding. Retail might be a bit of a question mark going forward. But I seem some potential turnaround opportunities in life sciences and cold storage.
For any investors on the hunt for bargains, I might start there.
Editor’s Note: Tomorrow is Christmas Eve followed, of course, by Christmas Day. For that reason, we’ll resume our prediction series with Brad on Friday, December 26. Be sure to check back then when Brad will share which property sectors have surprised him, and which REITs look like screaming buys as we approach 2026.
And if you’d like to hear more from Brad right away, be sure to check out this presentation. As our editor puts it, a new initiative out of the Trump administration is setting up a major opportunity in one corner of the real estate market. For profit-minded investors, now is the time to take a stake. Get all the details right here.
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