Softening Interest Rates to Stabilize REITs in ’25

Stable interest rates are providing a much-welcome calm after several volatile years for U.S. equity REITs. As a result, we expect more opportunity for capital raising and transaction activity for commercial real estate in 2025.  Reflective of this, Fitch Ratings has issued a “neutral” outlook for the sector, an improvement from its “deteriorating” outlook in 2024. Bright spots include data center REITs, office REITs and retail REITs, while industrial REITs are likely to face challenges due to increased supply and decreasing occupancy rates.

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Data Centers: Big potential, big risks

The meteoric rise of AI is fueling a boom in data center demand, driven largely by hyperscale demand. This demand is expected to persist in the intermediate term as firms invest heavily in infrastructure to support workloads around emerging tech and applications of AI.

To manage this growth and reduce exposure to potential risks, data center REITs are increasingly turning to joint ventures. Companies like Equinix and Digital Realty have entered partnerships specifically designed to meet this urgent need. These structures allow for risk-sharing and capital efficiency.

However, the sector could still face some hurdles. While AI is a major growth driver, the ability of large technology firms to monetize these investments remains uncertain. A sudden pullback in AI-related demand could significantly impact REIT performance. Additionally, the heavy reliance on a small number of tech giants creates concentration risks.

Industrial REITs: Demand holds, supply looms large

Industrial REITs are still experiencing tailwinds from the e-commerce boom and a push to bring manufacturing back to U.S. shores. But 2025 could bring a reality check: there has been a surge in warehouse development, and supply is starting to outpace demand. Occupancy rates are slipping ever so slightly. Still, the fundamentals remain solid.

If the market can absorb this new space, we’ll see continued strength. But if supply overshoots demand, it will have a cooling effect.

Office REITs: A tale of two cities

The office sector remains a mixed bag. Remote work is here to stay, but so is the need for high-quality office space in prime locations. Mediocre spaces with dated designs and less desirable locations are struggling, while Class A buildings in central business hubs are well-positioned to capture demand.

As pre-pandemic long-term leases expire and employers continue to rethink their office strategies, there is an increasing desire for spaces with modern amenities and incentives to draw people back to the office. Looking ahead, we also expect to see more conversions of old office buildings into residential or mixed-use, which will help stabilize occupancy rates, though the impact will be marginal.

Retail REITs: Construction decline boosts demand

One especially bright spot is retail REITs, particularly those anchored by grocery stores and necessity-based tenants. Limited new development has created a scarcity of high-quality retail space while demand remains strong. The ‘death’ of brick-and-mortar retail over the past few years has been exaggerated. In fact, store openings have exceeded closures despite headlines being dominated by bankruptcies and struggling big box retailers. While enclosed malls continue to decline, centrally located, open-air shopping centers are performing well.

Stability in the sector is supported by a high proportion of investment-grade tenants with healthy balance sheets.

Net Lease: Slow and steady wins the race

Net lease REITs tend to be stable as long-term leases (with built-in rent increases over time) and protection from property expense increases have helped these REITs weather inflation and economic uncertainty.

Many players are diversifying their portfolios and cash flows through acquisitions, including Four Corners Property Trust, Inc. and Getty Realty Corp.

Fitch expects net lease REITs to continue to be reliable with good balance sheets, low leverage and substantial liquidity

2025 will likely be a year of transition for U.S. equity REITs. While the sector doesn’t appear set for explosive growth, plenty of opportunities—especially within some key subsectors—remain. Stable interest rates provide a solid backdrop, but success will come down to picking the right spots.

Whether it’s grocery-anchored retail, well-located industrial spaces, or high-quality office assets, the common thread is clear: quality. The market appears to be rewarding thoughtful, disciplined investment strategies—and that’s not likely to change in the coming year.

Chris Wimmer is a senior director at Fitch Ratings.