Review and Outlook

as of 12/31/23

Following a three-month downturn, the markets went on a bull run in the last two months of the year. Improving inflation data coupled with dovish comments from the Federal Reserve spurred an “everything rally” in which real estate fully participated. In a significant shift from its earlier stance, the Fed suggested it was planning three interest rates cuts over 2024. The end of “higher for longer” rate concerns was a tailwind for REITs, as the market views this category as a beneficiary of lower rates. Despite low unemployment and robust consumer spending – typically viewed as inflation drivers -- inflation continued to trend lower, with the annual rate dropping to 3.4% in December. Investor fears of a recession were replaced by optimism that the Fed had successfully orchestrated a “soft landing,” generating further cause for cheer on top of the prospect that the Fed would soon start cutting interest rates.

Baron Real Estate Income Fund increased in the quarter. Holdings within the industrial REITS, data center REITs, and non-REIT real estate companies categories contributed the most. No category materially detracted. Top contributor Prologis, Inc. led gains within industrial REITs. The portfolio’s two data center REITs positions both posted double-digit gains. Third largest contributor Toll Brothers, Inc. led positive performance within non-REIT real estate companies.

The last few years have been unusually challenging for real estate. Much of real estate has had to absorb a hurricane of headwinds including COVID-19, the most aggressive Federal Reserve rate tightening campaign in decades, a spike in mortgage rates from 3% to 8%, fears of a commercial real estate crisis, a tightening of credit availability, multi-decade high inflation, and supply chain challenges. We are encouraged by the strong performance of real estate equities in the most recent quarter and believe many of the challenges of the last few years are subsiding. Though we expect market volatility at various points in the year ahead, we believe brighter prospects for real estate are on the horizon. We also believe the narrative about a commercial real estate crisis is hyperbole and unlikely to materialize. Public real estate generally enjoys favorable demand versus supply prospects, maintains conservatively capitalized balance sheets, and has access to credit.

We have assembled what we think is a portfolio of competitively advantaged real estate companies with compelling long-term growth and share price appreciation potential. We have structured the portfolio to capitalize on high conviction investment themes. Valuations and return prospects are attractive. We believe the benefits of our broader and more flexible approach that prioritizes a full array of REITs but also invests in non-REIT income-oriented real estate companies will shine even brighter in an evolving real estate landscape.

Top Contributors/Detractors to Performance

as of 12/31/23


  • Prologis, Inc. is the largest owner/operator/developer of industrial warehouse real estate in the world and is structured as a REIT. Strong performance was driven by positive operating and financial results. In addition, the company hosted an investor day and provided guidance for 2024 as well as the medium term, both of which included robust growth targets that exceeded investor expectations. We retain conviction. Industrial real estate has attractive fundamentals, with organic growth among the highest across all real estate asset types. Given Prologis's assets, markets, management, and balance sheet, we believe the company is well positioned to continue benefiting from this favorable backdrop.
  • ​Extra Space Storage Inc. is the second largest self-storage REIT. Shares gained following a strong earnings report, where full-year guidance was reaffirmed across operating metrics. Synergies associated with the recently completed acquisition of Life Storage also helped boost shares. While the-self storage industry is facing moderating demand and rent growth following a couple of years of outsized growth, we are reassured by the continued resilience of existing storage customers, and we expect rents for new customers to soon stabilize. We retain conviction in the longer-term business prospects for Extra Space and the self-storage industry overall.
  • Toll Brothers, Inc. is a leading U.S. homebuilder specializing in the luxury and "affordable luxury" segments. Positive performance was helped by a pronounced decline in mortgage rates, which made new home purchases more affordable. Share prices gains were also driven by strong operating and financial results, as the company continued to benefit from resilient demand for new housing, market share gains against smaller and less well-capitalized competitors, and healthy profitability margins and returns on capital. We remain shareholders. New single-family home construction activity in the U.S. remains below the levels needed to meet current and pent-up demand following a decade of under-building. In our view, Toll is a differentiated homebuilder with a niche focus on high-end homes and an excellent management team with high inside ownership. We think Toll Brothers is well positioned to benefit from housing growth through its sizable land bank, healthy balance sheet, and market share gains against smaller players.


  • Americold Realty Trust is one of the largest owner/operators of temperature-controlled warehouses in the world and is structured as a REIT. The company detracted due to weak financial results resulting from softer consumer demand for pantry stocking of food. We exited our position given these macro headwinds.
  • Equity Residential is an operator of 80,000 apartment units in high-barrier-to-entry coastal locations. The company was a detractor for the quarter due to soft new lease growth in its San Francisco and Seattle markets combined with a slightly lowered full-year outlook for blended rent and net operating income growth. Longer term, we retain conviction in Equity Residential due to its premier asset base in sought-after locations, attractive valuation, lack of housing supply relative to population growth, increasing construction and financing costs limiting new supply, and well-regarded management team.
  • CubeSmart is the third largest self-storage REIT. The company detracted from performance due to an industry-wide softening in pricing power and demand from new customers across self-storage properties, following two years of outsized growth. We exited our position.

Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting Please read them carefully before investing.

The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted.

Risks:All investments are subject to risk and may lose value.

The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed on this page reflect those of the respective writer. Some of our comments are based on management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change at any time based on market and other conditions and Baron has no obligation to update them

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

The index performance is not fund performance; one cannot invest directly into an index.