With office vacancy hitting record highs from California to Connecticut, the chorus lamenting all those empty cubicles is now echoing through the halls of Congress, not just from the corner office. In December, Sen. Joni Ernst of Iowa held a news conference urging federal workers to return to the office, putting federal agencies on blast after a report by the Government Accountability Office showed these organizations’ headquarters were being widely underused.

With all the attention paid to empty office buildings, asset allocators might be tempted to shy away from investing in real estate investment trusts altogether. That would be a mistake.

Though REITs have rallied robustly since the summer after a lackluster 2022, analysts and fund managers maintain it’s not too late to allocate a portion of your portfolio to the dividend-rich asset class. REITs investing in cell towers, the healthcare space and multifamily rentals top their list of attractive sectors offering healthier fundamentals and brighter growth prospects than office real estate vehicles.

There’s no question landlords are still struggling to fill offices. But the REIT universe is very diverse, with companies owning, managing and developing everything from office buildings to apartments to retail malls. Each sector has its own fundamental drivers, growth strategy and sensitivity to the economy and interest rates.

“The diversity of property sectors in the publicly traded REIT market is profound,” says Evan Serton, senior vice president and senior portfolio specialist at Cohen & Steers, a New York City investment management firm with $75.2 billion in assets. “Office REITs are only 3% of the publicly traded REIT market. So, there’s 97% of the market that’s in other things, and some of those are enjoying much healthier prospects, much healthier growth.”

Furthermore, despite the recent REIT rally, some analysts believe REITs are still fairly valued. The 197 REITs in the FTSE Nareit All Equity index rose 11.36% for the year ended December 29 after falling 26.29% in 2022. Helped mainly by the expectation of lower interest rates, REITs outperformed the broader U.S. equity market in the fourth quarter.

Still, REITs also traded at a 10.79% median discount to their net asset value (NAV), which is what their assets would fetch in a private transaction, according to S&P Global Market Intelligence. These securities are pricing in the expectation that there will be a soft landing for the economy and that the Federal Reserve will cut interest rates (Fed Chairman Jerome Powell suggested in December that the Fed might at least be done hiking rates).

Many industry observers expect REITs to continue posting positive stock returns in 2024, aided by an uptick in earnings growth. UBS expects the 200-plus REITs it covers to grow earnings per share 3.7% on average from 2023 to 2024 and to yield 4.0%.

REITs essentially are a bet on the movement of interest rates. They rise in a lower rate environment and flounder when rates are high, as they did in 2022. Essentially tax structures, REITs must pay out 90% of their profit in dividends. So they’re a magnet for investors seeking steady dividend income.

Morningstar senior equity analyst Kevin Brown says all of the 19 REITs he covers “are trading at a discount to fair value.” Those fair value estimates are based on the cash flows of the companies, which are forecast 10 years forward; he then determines the terminal value of the overall ongoing enterprise value of those companies.

Brown expects REITs to generate “solid positive performance” over the next few years and for them to outperform the broader equity market if rates fall. He also notes many companies were performing well starting in early 2022, and that drove their revenue growth and net operating income to historic levels as they recovered from the pandemic.

But people who invested in REITs for the dividend yield rotated out of the sector when interest rates rose, since Treasurys became a less risky option. Many REITs are also Krazy Glued to interest rates because the business most times requires companies to load up on debt. Developing a project—whether it’s a skyscraper, office building or college campus—is expensive.

“If interest rates stabilize and potentially go down, people may be able to recognize the value these companies have been able to produce in their portfolios over the past two years,” Brown says.

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