REITs on the Rise After Rate Cuts: Where to Invest Now

Key Points

• REITs have already rallied in anticipation of the Fed's September rate cut and could continue to gain as investors expect future cuts to follow.
• Lower mortgage rates could encourage homebuyer demand, while reduced borrowing costs could stimulate developers.
• Companies focused on real estate in the data center, wireless communication, and affordable housing categories may be posed for outsized growth.

The Federal Reserve's rate cuts should benefit the real estate market. Lower interest rates mean lower mortgage costs for buyers and an added incentive to sell for homeowners not eager to trade in a low-rate mortgage for a higher one. Plus, lower rates could reduce borrowing costs for homebuilders, allowing them easier access to funding for development projects that could provide a much-needed inventory boost.

For many investors, particularly those not looking to buy property at this time, one of the best ways to exercise a bullish view on real estate is to target real estate investment trusts (REITs), publicly traded firms that own or manage their own portfolios of properties. REITs offer diversification through access to a broad pool of real estate holdings, simplification for investors not looking to oversee or manage properties themselves, and, perhaps most importantly, a mandated dividend distribution of at least 90% of taxable income.

REITs have been one of the earliest benefactors of the anticipated series of rate cuts by the FOMC. Starting in April, the Schwab U.S. REIT ETF NYSEARCA: SCHH began a prolonged rally that has continued through late September. The fund has increased by more than 30% in the last year. With analysts anticipating—and the Federal Reserve signaling the likelihood of—more rate cuts in the coming months, there is likely more room for REITs as a group to climb.

Equinix: REIT and Data Center Boosts

Equinix NASDAQ: EQIX is a REIT that focuses on digital infrastructure and data centers. Though data center demand has been high for decades, it is accelerating now in the midst of the boom in artificial intelligence use cases. This means that Equinix stands to benefit doubly—from the growth of REITs as a category and from new demand from data centers, which are expected to consume 9% of total U.S. electricity generation by 2030, up from 4% last year.

Equinix has a dividend yield of 1.94%, not especially high for the REIT space, but that nonetheless translates into a dividend payout of more than $17 in total per share each year. On top of that, the company has already noted impressive top-and-bottom-line growth. In the most recent quarter, Equinix noted a 7% year-over-year improvement in revenues and 45% growth in net income over the same period, driven by record gross bookings.

American Tower: 5G Growth Potential

American Tower NYSE: AMT owns and develops data center facilities as well as mobile communication towers. Besides its exposure to the data center space, American Tower also offers investors an access point to 5G technology. 5G still has a long growth runway, as forecasts suggest some 700 million 5G connections in North America by 2028, up from under 200 million at the end of last year.

This growth could help American Tower to continue its history of dividend growth. The company currently has an annualized 3-year dividend growth rate of 12.5% and a dividend yield of 2.80%. Though shares are already up 42% year-over-year, analysts view the stock as having upside potential, with an average price target of $234.00.

Sun Communities: Manufactured Home Appeal

One subsection of the real estate market that investors often overlook is manufactured and mobile homes. Sun Communities Inc. NYSE: SUI is a REIT focused on this space, which is growing thanks to increased demand from both first-time homebuyers of modest means and senior citizens looking to downsize or reduce their environmental impact. With mortgage rates dropping, homes at this price point will become affordable for a new group of customers as well.

Sun Communities has a healthy 2.77% dividend yield and a history of 5.6% annualized 3-year dividend growth. In the second quarter of this year, it swung back to net income from a net loss in the prior year quarter thanks in part to increasing occupancy rates for its mobile home and annual RV sites.

REITs Resilient Despite Uncertainty

The real estate market is notoriously difficult to predict, with the residential portion of this space particularly hard to time. The REITs above capitalize on trends that are likely to continue regardless of near-term volatility in traditional residential real estate, making them suitable for buy-and-hold investors.