The Morningstar US Real Estate Index was up 12.41% over the trailing 12 months, slightly better than the 11.50% gain seen by the broader US equity market. However, these stocks significantly outperformed the broader market in the first quarter of 2025, up 3.41% compared with a 1.74% decline by US equities, offsetting the sector’s underperformance in November and December 2024.
The stocks under our real estate coverage currently trade at a 13% discount to our estimate of their average fair value, which is slightly better than the North American average. Currently, 15% of the sector is trading in the 5-star range, 41% is in the 4-star range, 38% is in the 3-star range, 5% is in the 2-star range, and none are in the 1-star range.
Same-store net operating income growth continues to decelerate across most real estate subsectors from the historic highs seen in 2022, though several are producing growth around their long-term historical averages. Most companies reported expected results on their fourth-quarter earnings calls, and their guidance for 2025 was generally in line with our expectations.
The real estate sector’s relative performance has moved in line with interest rates over the past several quarters. REITs saw positive relative performance in the first quarter of 2025, despite many reporting decelerating same-store net operating income growth for the fourth quarter of 2024. Revenue growth has settled into long-term historical average levels of growth around 3%, while expense growth remains slightly higher, leading to same-store NOI growth below the historical average for the sector.
Top Real Estate Sector Picks
Kilroy Realty
Kilroy Realty KRC shares have fallen since the onset of the covid-19 pandemic, even as the company’s NOI has increased materially due to the completion of development properties and acquisitions. We recognize the uncertainty surrounding the future of office real estate and believe the environment will remain challenging. However, we also believe the selloff has been overdone and the market is not recognizing the value of the company’s non-office-related assets and its land bank. Kilroy has a high-quality portfolio with an average building age of 11 years, compared with 34 years for its office REIT peers. The company should be a prime beneficiary of the flight-to-quality trend in offices. Further, it has a strong balance sheet with the lowest leverage within our office REIT coverage.
Healthpeak Properties
Healthpeak Properties DOC management team strategically focused the company around the medical office and life science portfolios. These sectors should provide steady and recession-resistant revenue growth. The company’s development pipeline should also produce yields above its cost of capital even in a higher-interest-rate environment, producing additional cash flow growth for shareholders. Healthpeak sold off because of rising interest rates, but we believe the current market-implied cap rate undervalues its portfolio of stable assets.
Federal Realty
The high-quality retail centers in Federal Realty’s FRT portfolio should produce higher retail sales growth than the brick-and-mortar average, keeping occupancies high and driving re-leasing spreads. The firm’s portfolio has the highest average population density and per capita income among all shopping center REITs, which are highly correlated with strong store sales productivity. As retailers are looking to slim store counts, they are usually choosing their highest-productivity locations, placing a premium on Federal Realty’s portfolio. The company’s strong internal and external growth prospects should also let it continue to support a high and growing dividend yield.