U.S. real estate investment trusts (REITs) outperformed the broader market on Thursday, buoyed by a softer-than-expected producer price index (PPI) report for July. The benchmark 10-year Treasury yield slipped to 4.645%, a decline of 4.73 basis points, which helped lift interest-rate-sensitive property stocks. AvalonBay Communities (NYSE: AVB) advanced 2.5% by late morning, recovering from a 1.08% drop on Wednesday.
The rally was driven by the notion that cooling producer prices could prompt the Federal Reserve to pause its rate-hiking cycle. According to the CME FedWatch tool, traders raised the probability of a September pause to 65%, up from 50% on Wednesday. The PPI rose 4.7% year-over-year, down from 5.5% in June, providing some relief to investors concerned about persistent inflation.
However, the session was not uniformly risk-on. The Dow Jones Industrial Average hovered near unchanged, while technology stocks advanced. The clearest strength was seen in property companies, which are particularly sensitive to interest rate movements. The Real Estate Select Sector Index (XLRE) rose 0.61%, while the Nasdaq Composite gained 0.79%.
Market Snapshot
- S&P 500: 7,796.03, up 0.61%
- Nasdaq Composite: 26,798.27, up 0.79%
- Dow Jones Industrial Average: off 0.01%
- 10-year Treasury yield: 4.645%, down 4.73 bps
- Brent crude: $87.66, down 1.48%
The producer price index increased 4.7% year-over-year in July, versus 5.5% in June. This deceleration in wholesale inflation reinforced expectations that the Fed may hold rates steady next month. Lower bond yields enhance the appeal of REIT dividends, which compete directly with fixed-income returns. Additionally, a decline in the risk-free rate can boost property valuations before any adjustment in rents.
REIT Sector Composition
Not all REITs are created equal. The Real Estate Select Sector Index is heavily weighted toward specialized assets such as data centers, cell towers, and healthcare facilities. The top five holdings account for 37.87% of the index, with Welltower (WELL) at 11.05%, Prologis (PLD) at 9.07%, Equinix (EQIX) at 7.17%, American Tower (AMT) at 5.40%, and Digital Realty (DLR) at 5.18%. Specialized REITs make up 39.54% of the index, while traditional office REITs represent just 1.03%.
AvalonBay's 2.5% gain on Thursday offset its previous day's decline. Based on Wednesday's close of $179.79, the stock is trading at approximately $184.28, an early estimate ahead of the official close. That price remains about 15.6% below Bank of America's price objective of $213. In July, analyst Jeffrey Spector named AvalonBay among his top seven REIT picks.
Bank of America's Top REIT Picks
- AvalonBay Communities (AVB) - Target: $213
- Welltower (WELL) - Target: $277
- Agree Realty (ADC) - Target: $92
- American Healthcare REIT (AHR) - Target: $67
- CubeSmart (CUBE) - Target: $47
- Macerich (MAC) - Target: $28
- Phillips Edison (PECO) - Target: $45
Bank of America values the REIT sector at 92% of net asset value, compared to a historical average of 97%. The firm projects funds-from-operations growth of 7.3% in 2026 and 8.3% in 2027. The Real Estate Select Sector Index has returned 13.39% year-to-date, 12.61% over the past year, and 2.88% annually over five years.
Despite Thursday's gains, analysts caution against chasing the rally. Mizuho strategist Evelyne Gomez-Liechti noted, "I would still be careful chasing rallies," pointing to supply concerns, fiscal worries, and an oil-driven term premium on the long end. A single inflation reading may not establish a persistent rate trajectory, and long yields could rise again due to Treasury issuance, fiscal strain, or energy price changes.
For REIT investors, the key is whether the 10-year yield can sustain its decline. Thursday's advance reflects sensitivity to rates rather than confirmation of a lasting trend. Property fundamentals and leverage could also offset the impact of lower discount rates. The next test will be the durability of this yield move, which will be closely watched in the coming sessions.
