Real estate is one corner of the market that investors are moving into as expectations of interest rate cuts grow. Markets are betting this month’s inflation data will justify the Federal Reserve cutting interest rates, as it has repeatedly said consumer prices must fall for that to happen. It is commonly believed that real estate related assets such as REITs benefit from lower interest rates. This is because many investments in this asset class involve leverage and borrowing, and the lower the interest rate, the lower the cost of holding the investment. A lower interest rate environment also increases the attractiveness of this investment in terms of the higher rental income yield that real estate offers. But there’s no guarantee – and such assets can also be good when rates are higher. For example, the extent of borrowing costs depends on debt loads and industry type, among other variables. For those interested in REITs, Morningstar is bullish on a name it says is “cheap” and offers high yield. ‘Catalysts for future earnings’ This is US-listed Kilroy Realty, Morningstar equity analyst Suryansh Sharma said in a July report. The company owns, develops and acquires prime office, mixed-use and technology- and life-science-related properties in US cities. Also in July, Morningstar US chief strategist Dave Sekera named Kilroy as one of his four new stocks to buy “with catalysts for future earnings.” Sharma said “the REIT is positioned to take advantage of the growing life sciences sector with exposure to materials in its portfolio and development pipeline,” adding that “We believe that while remote and hybrid work solutions will gain increasing acceptance, office will continue to be central to the workplace strategy.” He gives a Morningstar fair value estimate of $59, which translates to a 46% undervalue, according to him over time, which in turn will lead to a recovery in office real estate demand, he said.Over the next decade, Sharma expects an annual growth rate of 0.9% in the average rent per square foot for Kilroy’s portfolio that Kilroy’s significant growth pipeline will deliver returns of approximately 6.50% through 2033, adding incremental net operating income and contributing significantly to the company’s valuation,” he said. Currently, Kilroy’s dividend yield is about 6%, according to FactSet data. “Focusing on technology and life sciences market groups will benefit Kilroy in the long term as we expect strong growth in these areas. The company’s high quality office buildings with good amenities should benefit from the flight to quality trend,” Sharma said. Sekera pointed out that Kilroy is “one of the most undervalued” REITs covered by Morningstar, but one positive is that the company is turning to the technology sector. “When we look at technology employment, it has grown,” he said. “When we look at a metric of tech job postings within their specific market sectors, some of the biggest tech companies like Apple, Alphabet, Amazon, Meta all require employees to go back to the office, go back to this hybrid work schedule of at least three days per week.’ He also noted that the buildings in Kilroy’s life sciences portfolio are only 11 years old — significantly younger than many of their peers. That means it should lead to better occupancy rates, Sekera said. But according to Sharma, investors should note that overall, the telecommuting dynamic that persists across industries will continue to be a significant risk. “The dynamics of remote work are perhaps the biggest source of uncertainty for the office real estate industry. The pandemic has shown us that technology can help workers collaborate and stay productive while working remotely,” he said. “Hybrid workplace policies are now increasingly the norm and pose a significant challenge to future office demand.”