The two-year-old bull market in stocks hasn’t been kind to real estate investment trusts, better known as REITs. This sector, which consists of companies that own commercial buildings, warehouses and other rental real estate, was the worst-performing sector in the S&P 500 index in 2024. But top REIT expert Gregg Korondi, CFA, says recent macroeconomic shifts and relatively cheap valuations have positioned REITs in a sweet spot for small investors.

Real estate investing has been in the crosshairs because we are experiencing the highest short-term interest rates in more than a decade. Higher rates greatly increase the costs of borrowing, purchasing and maintaining properties for REITs. But that changed last September when the Federal Reserve launched multiple rate cuts that could bring the Federal Funds rate as low as 3.5% by the end of 2025. Falling interest rates also make the reliable dividends that REITs pay look more attractive as yields on cash and short-term bonds drop.

Three more reasons to consider REITs for your portfolio…

  1. Bargain prices. REITS are relatively cheap versus the broad market. The Real Estate Select Sector index recently traded at around 16 times forward funds from operations (FFO)—that’s the REIT equivalent of price-to-earnings ratio (P/E). The S&P 500’s average P/E is at about 27.
  2. Pricing power.  High interest rates and cautious bank lending has limited the amount of rental real estate construction since the COVID pandemic. Demand in rental markets is likely to outweigh supply for the next several years, so REITs have a tailwind to hike tenant rents and improve REITs earnings. Rental properties themselves also are rising in value.
  3. Defensive advantages. REITs have historically held up better than the overall stock market in the type of slowing economy and volatile market that many analysts expect in 2025.

Bottom Line Personal asked Korondi how he’s investing in REITs and which are his favorites now…

Ways to Play REITs Now

The biggest mistake I see REIT investors making is looking at the industry as a monolithic asset class.  REITs actually are a diverse microcosm of the US economy with properties ranging from suburban apartment complexes and cloud data centers…to shopping malls and nursing homes…to urban office buildings and RV parks. Each niche has different prospects and responds to economic shifts uniquely.

Example: Despite improving conditions for many REITs, companies with exposure to office buildings continue to be plagued by vacancy concerns because many employers have maintained post-COVID work-from-home arrangements. Investors hoped for a turnaround recently when Amazon.com instituted a policy requiring corporate staffers to spend five days a week in the office, but I am skeptical that a bottom has been reached among office-building REITs and this subsector remains a higher-risk bet.

Here are the REIT subsectors and individual REITs that I find attractive now. Note: When assessing a REIT’s performance, yield is a good metric to use because REITs must distribute a minimum of 90% of its taxable income to its shareholders via dividends.

Data-center REITs own and manage highly specialized facilities that customers use to safely store digital data and provide uninterruptable power supplies and physical security. The world is going digital, and these companies capitalize on the surging demand for cloud computing, which allows millions of workers and consumers to store and transmit online data from remote servers over the Internet. In addition, data centers now are benefiting from another massive trend—big tech firms need to rent space to train and employ artificial-intelligence (AI) software. AI-related infrastructure represents a potential $60 billion opportunity over the next few years for data centers. One data-center REIT I own now…

Equinix (EQIX), one of the world’s largest digital infrastructure companies, operates 260 data centers in 72 major metro markets. The company has delivered 87 consecutive quarters of revenue growth—the most of any company on the S&P 500. Equinix’s large-scale xScale data centers are ideally suited to support the requirements of AI inferencing programs, which are only just beginning to be deployed. Recent yield: 1.82%.

Residential REITs offer a variety of rental properties from single-family homes to multifamily high-rise buildings. This is one of my favorite subsectors thanks to powerful demographic trends. America is in the midst of a housing shortage that has driven up home prices. High mortgage rates and tougher loan-qualification processes for potential buyers mean more people are choosing to rent and remain renters for longer periods. Residential rents jumped 30.4% nationwide between 2019 and 2023. Two residential REITs I own now…

AvalonBay Communities (AVB) has a diversified, national portfolio of nearly 300 multifamily properties and 87,000 units in areas such as New England…Washington, DC…the Sun Belt region…and California. Currently, the company has $2.3 billion of capital investment projects in the works, which will add 6,000 more apartments. Avalon Bay specializes in building upscale properties in wealthy regions with high barriers to entry and difficult zoning requirements. Recent yield: 2.93%.

Essex Property Trusts (ESS) has ownership stakes in more than 250 apartment communities and collects monthly rental payments on about 62,000 units. Its high-quality properties are located around West Coast technology hubs in Southern California, San Francisco and Seattle. That strategy has allowed Essex to raise its dividend for 30 consecutive years including through the last three recessions. Recent yield: 3.21%.

Manufactured-housing REITs lease or rent land sites to more than 22 million owners of recreational vehicles (RVs) and manufactured or mobile homes. The properties are typically more upscale than earlier-generation mobile home parks with amenities such as fitness centers and pickleball courts. These businesses require very little capital to maintain cash flow given that they own only the land, not the structures they rent to. Plus, local zoning ordinances around the country often prohibit new manufactured housing communities, so existing ones stay full and can increase rents year after year. One manufactured housing REIT I own now…

Equity Lifestyle Properties (ELS) operates 450 mobile-home and RV communities in 35 states (as well as British Columbia). The company, which has raised its dividend for 20 consecutive years, targets attractive properties in the Sunbelt region for the over-55 population. Equity Lifestyle also has found a lucrative complement to its core business—it operates 23 marinas in Florida and the Carolinas with about 7,000 slips. These properties face very little competition, so rent rates keep rising. Recent yield: 2.69%.

Logistics REITs own storage warehouses and facilities essential to store, process and transfer goods for manufacturers, shippers and transport/freight companies. Tenants typically sign long-term contracts with built-in rent increases and a triple net lease structure, which makes the tenant responsible for covering building insurance, real estate taxes and maintenance. These REITs have benefitted from rising online sales and e-commerce. They also have a long growth runway ahead of them thanks to supply-chain issues that have caused companies to bring their manufacturing back to the US. One logistics REIT I own now…

Rexford Industrial Realty (REXR) operates more than 50 million square feet of rental space in Southern California, one of the largest industrial markets in the world with a scarcity of developable commercial land. Clients range from FedEx to Best Buy to high-tech defense contractor L3 Technologies. Rexford has grown its dividend by an average of 15% annually since its 2013 IPO. Recent yield: 3.97%.

Self-storage REITs. Mini-warehouse storage facilities rented to individual and small businesses on a monthly basis are inexpensive to operate and generate good profit margins and investment returns. Self-storage also is considered a recession-resilient sector since demand often is driven by downsizing and moving. One self-storage REIT I own now…

Public Storage (PSA) is the largest owner of self-storage facilities in the US with more than 3,000 facilities in 40 states, most located near densely populated urban areas. Since 2019, the company has invested $11 billion in acquisitions and development projects, adding 56 million square feet to its portfolio. The company is able to break even if just 35% of its space is rented (typically over 90% is occupied). Recent yield: 3.55%.

*Performance figures are as of November 25, 2024 and courtesy of Morningstar, Inc.

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