With interest rates expected to decline in 2024, real estate – an industry beloved for its steady income payments – could see upside in the new year. The real estate sector of the S&P 500 closed 2023 with gains of more than 8%, significantly underperforming the broad market index’s 24% gain. Rising interest rates have driven up this segment of the market, as they not only raise borrowing costs for REITs, but also make the asset less attractive to income-seeking investors than Treasurys, for example. Don’t forget that last year, investors could earn returns of more than 5% just by throwing money into a certificate of deposit or stashing it in a money market fund or Treasuries. Now that the Federal Reserve has made three rate cuts in 2024, REITs could see an increase in investor interest, boosting their stock prices in addition to income. “I think REIT prices will go up if we have stable interest rates — you’ll have people coming back into the industry,” said Morningstar analyst Kevin Brown. “When interest rates are low, many income-oriented investors see dividend REITs as very attractive and are willing to take the risks associated with equity investments to have that dividend payment.” Indeed, real estate was the top sector in the fourth quarter of 2023, rising 17.6%, ending with a one-month gain of nearly 8% in December alone. The moves coincided with a significant cooling period for the 10-year Treasury yield, which topped 5% at its peak in October and ended the year just above 3.8%. A sharp eye The post-Covid work-from-home trend and the slow return to the workplace has been an impact on office REITs. Kastle Systems’ Back to Work Barometer, which measures office occupancy in 10 major U.S. cities, came in at 51.1 percent on Dec. 18, up from 51.6 percent the previous week. Difficulties remain for office REITs in 2024, according to Jefferies, but conditions are expected to improve. “While we wait [occupancy] cuts roughly half of our coverage in ’24, we expect the pace of declines to slow, which should be a tailwind for sentiment,” analyst Peter Abramowitz wrote in a Monday report. Jefferies is neutral on office REIT sector, but has raised a rating on Boston Properties to buy from hold. BXP 1Y mountain Boston Properties’ performance over the past 12 months “We see BXP as an attractive play for relative multiple expansion versus peers given its status as industry leader, with one of the highest quality portfolios in the space and stability in its earnings outlook,” the company said. Boston Properties benefits from its “contemporary portfolio” in the coastal office REIT industry, with buildings having a weighted average age 15.7 years, versus 22.7 years for All Public REITs, Jefferies said.In turn, this should lead to further stability in the occupancy outlook. Jefferies’ price target of $80 reflects a 14% upside from Friday’s close. The stock yields 5.4%. Thirteen of 21 analysts covering Boston Properties’ rate are hold, and consensus price targets call for a decline of about 5% from here, according to LSEG. Spotting Long-Term Trends Even if a lower-rate environment is beneficial for AEOs, Morningstar’s Brown sees one corner of the industry likely to get a long-term boost from emerging demographic trends: senior housing and the healthcare space. The senior housing occupancy rate was 84.4% in the third quarter of 2023, according to the National Investment Center for Seniors Housing & Care. That’s up 6 percentage points from the pandemic low of 77.8%, but still far from the pre-pandemic occupancy rate of 87.1%. At the same time, baby boomers are aging rapidly, with the oldest members of the cohort turning 80 in 2026. “That translates into demand for these facilities,” Brown said. He predicts that over the next three to four years, demand will outstrip supply, “and that will translate into a return to pre-pandemic levels – and maybe even over 90%.” To play this trend, Brown highlighted Welltower and Ventas. “I think they will see high growth for many years to come.” Welltower, which invests in senior housing providers, pays a dividend yield of 2.7%, while Ventas pays 3.6%. JPMorgan’s Anthony Paolone upgraded Welltower to overweight from neutral in December, pointing to Welltower’s disclosure of a “significant increase in the pace of acquisition activity, with $3 billion closed through October and another $3 billion underway.” . He also raised his 2024 year-end price target to $99 from $92, indicating a nearly 10% upside from Friday’s close. Twelve of the 18 analysts covering Welltower rate it a buy or strong buy, according to LSEG, and consensus price targets suggest upside of more than 3% from current levels. Ventas received buy or strong buy ratings from 60% of analysts covering the stock, with the average price target suggesting a 2% upside from here. A dividend aristocrat in focus For 2024, Morningstar’s Brown likes Realty Income , a triple net lease REIT. In a triple net lease, tenants are responsible for maintenance, rent, property taxes and insurance premiums. “They just collect the rent check from their tenant, otherwise everything else about the property is up to the tenant,” Brown said, noting that Realty Income’s tenants include pharmacies and gas stations. Real estate income pays a dividend yield of 5.3%. It is also a member of the S&P 500 Dividend Aristocrats, meaning it is a stock that has raised its dividends in each of the last 25 consecutive years. “They’re a solid rent collection company, and that’s a good thing if we’re in some kind of potential slowdown or recession,” Brown said. Nearly half of analysts covering real estate income rate it a market or strong market, calling for a rise of more than 5%, per LSEG. – CNBC’s Michael Bloom and Chris Hayes contributed reporting.