The real estate outlook is brighter in 2025, according to many on Wall Street. Nearly two years later, the “dawn of a new cycle” for REITs has come, according to Citi. The company expects REITs, which typically pay dividends, to deliver a total return of 10% to 15% in 2025 thanks to accelerating year-over-year earnings growth, lower supply deliveries, a strong macroeconomic backdrop and reasonable valuations. “Compared to previous years, we believe there will be mostly stable interest rates at the same time as fundamentals accelerate — and strong fundamentals could continue and strengthen given the scarcity of new supply over the next few years,” Citi analyst Nick Joseph wrote. In a note last week. The iShares US Real Estate ETF (IYR), which tracks US stocks in the real estate sector, has a total return of more than 8% in 2024. The iShares US Real Estate ETF (IYR) in 2024 is also Bank of America. He is bullish on REITs, noting that stocks are trading near record-low relative multiples and that 50% of REITs offer a higher yield than 10-year bonds. In addition, the proportion of the S&P 500 real estate sector with a B+ or higher quality rating from S&P has doubled over the past decade to 70%, analyst Jeffrey Spector said in a Dec. 6 note. “Overall, we believe the backdrop to 2025 is positive for REIT fundamentals,” he wrote, noting that the bank’s economic team expects healthy GDP growth. “Supply is expected to decline in '25 with a potential historically low in '26,” Spector added. “In addition, public REITs maintain a cost of capital and access to capital advantage over private owners, and stable interest rates may provide sufficient visibility to fuel transactions while narrowing the gap between buyers and sellers.” Signs of Strength One sign of potential strength in REITs comes from the rise in transactions seen in CBRE's US real estate transaction volumes, according to Janus Henderson. This increase is usually a good sign of an inflection point in the cycle, the company said. “The rebound in transactions…highlights multiple avenues for REITs to boost earnings growth, enhance expectations for asset values and, ultimately, the potential for higher stock prices and increased earnings in a new cycle,” said a Nov. 11 report from Janus Portfolio Managers Gregg. Cole and Danny Greenberger. Cole believes 2025 will be mostly about fundamentals, which he said could help lift valuations. While there has been speculation about possible policies the Trump administration will pursue next year that will lead to higher inflation, he believes it is too early to invest in that theory at this point. “I think a lot of that has been priced in in the weeks and months leading up to the election,” said Kuhl, who runs the firm's US Real Estate ETF (JRE) alongside Greenberger. He said his base case is that the 10-year Treasury yield will remain around the range it has been in. Therefore, you can get a total return of about 9%. “It's growth, plus earnings,” the JRE 1Y Mountain Janus Henderson US Real Estate ETF said. “If you layer on some undervalued stocks that you can pick on top of that, that's an extra return.” Where to Invest However, not all REITs are created equal, and some areas are more suitable than others. Citi, which is heavy in the healthcare, residential, industrial and infrastructure sectors, said stock picking will continue to be a driver of alpha. It has a typical portfolio of REITs that maintain overweight positions in a mix of sectors. Below are some of the holdings in that portfolio. Healthcare REITs are a popular choice among analysts and investors right now. Janus Henderson believes the biggest opportunity now lies specifically in senior housing. Janus's Kuhl explained that the population is aging at the same time as there is a supply problem. “There is almost nothing being built in the country for those right now,” he said. “At the same time, you have huge tailwinds from demand that are very clear and will happen. So, that's a really good story.” Welltower, which owns and develops senior housing, skilled nursing/post-acute care facilities and medical office buildings, is among JRE's top holdings. Cole also sees opportunities in data centers, which will benefit from the AI boom. JRE's largest owned company is data center company Equinix. In addition to opportunities in data centers and healthcare, there is value to be found in retail, according to Steve Brown, senior portfolio manager at American Century Investments. He particularly likes outdoor, grocery-centric malls. He said the demand is high and there is very little construction. “Mall occupancy is going up, asking rents are going up, and there are very few store closings or bankruptcies,” said Brown, who runs the company's real estate fund (REACX). “Public companies are reasonably priced compared to other real estate sectors because they are still not considered a hot asset class.” He likes Regency Centers and Urban Edge Properties. He also likes Simon Properties Group in the mall subsector, because occupancy rates and rents are rising and there is no new supply. Bank of America is also overweight in health care and retail. “We are very focused on REITs that have the best earnings visibility, the highest growth prospects and where Street estimates are high,” Bank of America's Spector said. “While we believe the barbell approach is the best fit between quality and value, we prefer REITs with strong, resilient balance sheets that can drive external growth in 2025.” Here are some of the company's top picks for 2025. American Healthcare owns a diverse portfolio of healthcare assets, including senior housing, skilled nursing facilities, and medical offices. Spector believes the company, which went public in February, will benefit from the high-end housing trade due to an aging America. In residential areas, he likes American Homes 4 Rent. “We remain positive on AMH's portfolio, limited new supply of single-family homes, structural demographic headwinds with aging millennials, accretive consolidation/development opportunities, and strong management,” Spector said. “Higher mortgage rates are also a benefit for single-family rental REITs.”
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Wall Street expects a rally in 2025 for these dividend-paying real estate stocks
