Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Real Estate Stocks Are Trailing the Rally in 2026
Transcript
- Lucas: Let me start with a number that jumped out this week. The S&P 500 closed above 7,400 for the first time on Monday. Small caps are up almost 2% in the last five days. But there's a sector that's basically been flat to down for the entire second quarter. Real estate stocks. Luna: That's interesting because headlines are still talking about a housing shortage and record rents in major cities. What's driving the disconnect? Lucas: Right, the narrative is strong on the ground, but the market is pricing in something different. The Dow Jones U.S. Real Estate Index is down about 2.3% this month alone. And that's not just office space — we're talking apartment REITs, industrial, even some data-center landlords. The common thread is interest rates. Luna: The ten-year Treasury is still hovering around four and a quarter percent. That's not new. Why is it hitting real estate harder now? Lucas: Because the spread between the ten-year yield and the average REIT dividend yield has compressed to the narrowest level since 2007. A lot of investors own REITs for income. When you can get 4.2% risk-free on a Treasury, a REIT yielding 4.5% with all the volatility of commercial property starts to look less compelling. Luna: So it's a relative value problem. But aren't some REITs still raising rents and growing cash flow? Lucas: Some are. Data-center REITs like Equinix and Digital Realty are benefiting from AI demand. But the market is looking at the broader picture: cap rates are rising. If you're a buyer of commercial property today, you're demanding a higher return to compensate for higher financing costs. That pushes down valuations for existing properties. Luna: And that flows through to the stock prices of the REITs that own those properties. Makes sense. But what about homebuilders — they're not REITs, but they're in the same sector bucket. Lennar and DR Horton have both been under pressure. Lucas: Yes, and that's a slightly different story. Homebuilders are actually selling houses at a decent pace — there's still a structural shortage of single-family homes. But the market is worried about margins. Lumber prices have been volatile, labor costs are up, and there's a fear that if mortgage rates stay above 7%, demand could soften. Luna: So the market is pricing in a slowdown before it actually happens. That's typical for real estate, which tends to be a leading indicator. Lucas: Exactly. And there's another layer: office real estate is still a drag on the entire sector. Even hybrid-work adoption in 2026 means many downtown office towers are at 60% occupancy. REITs like Boston Properties and SL Green are still trading at deep discounts to net asset value. Luna: I've seen that the office vacancy rate in San Francisco is still above 30%. That's not recovering quickly. Lucas: Right. And retail REITs are a mixed bag — strip centers with grocery anchors are doing okay, but malls are still losing foot traffic. So the real estate sector is really a tale of sub-sectors right now. The broad index masks that divergence. Luna: So for a stock picker who wants to be in real estate, it's not a 'buy the sector' moment. You have to be very specific. Lucas: Exactly. I'd argue that if you're looking for income, you need to compare REIT dividends directly to Treasuries and be selective. Some industrial REITs with long-term leases and inflation escalators still offer a decent risk premium. But the days of blindly buying a basket of REITs for yield are over for now. Luna: You know, speaking of being selective and thinking about value — that's actually a big part of why we keep the show ad-free. We want to give you our honest take without any sponsor dictating the conversation. Lucas: That's right. And if our discussions have helped you think about a stock or a strategy differently, and you'd like to support that, the link is buy me a coffee dot com slash fexingo. It's a simple way to keep this independent. Luna: No pressure at all. Just if you find value here, that's the place. Now, back to real estate — I want to ask about a specific name that I think is interesting right now. Lucas: Go ahead. Luna: Prologis. It's the big industrial REIT, focused on warehouses and logistics. It's down about 8% year-to-date. But e-commerce growth continues, and they have pricing power. Is the sell-off overdone? Lucas: I think it might be. Prologis has a portfolio that's about 97% leased, and they've been able to push rents up double digits on renewals. The concern is that new supply is coming online — a lot of warehouses were built during the pandemic boom. But Prologis's properties are in prime locations near major transportation hubs. I'd rather own Prologis than a broad REIT ETF. Luna: So you're saying the baby is being thrown out with the bathwater. The market is punishing all real estate, but the quality names are getting caught in the downdraft. Lucas: That's the opportunity for an active stock picker. If you can identify which sub-sectors still have fundamental tailwinds — like industrial, data centers, maybe self-storage — you can find bargains. But you have to be patient. Real estate tends to lag when rates are rising, and then it can snap back quickly when the rate outlook shifts. Luna: And when do you think that shift happens? The Fed hasn't signaled a cut anytime soon. Lucas: The Fed is data-dependent. If the economy softens, they'll cut. But for now, the market is pricing in maybe one cut by year-end. Real estate might continue to underperform until there's clarity. That said, if you have a 12- to 18-month horizon, buying quality real estate at a discount could work out well. Luna: So for someone listening who wants exposure but doesn't want to pick individual stocks, what do you recommend? Lucas: I'd look at a targeted thematic ETF like the Industrial Select Sector SPDR, which has some real estate exposure, or a data-center REIT ETF. Avoid the broad real estate index until the rate picture clears. And if you do buy individual REITs, focus on those with low leverage and long-duration debt. Luna: Low leverage, long-duration debt — that's solid advice. Because if rates stay higher for longer, the REITs that need to refinance soon are going to feel real pain. Lucas: Exactly. And that's the kind of nuance that gets lost in a market that's hitting new highs elsewhere. Real estate is a reminder that not every sector participates equally. For a stock picker, that's where the edge lives.