By Ian Salisbury
In a market where the tech trade looks increasingly tired, real estate stocks -- which still boast low valuations and high dividend yields -- may be just what investors are looking for.
The new year is shaping up solidly for real estate investment trusts. The sector has returned 2.7% compared with 1.7% for the S&P 500 index. REIT shares trade at just 17 times next year's funds from operations, REITs' equivalent to operating profits, compared with the market's forward price/earnings ratio of more than 22. Things look even better from an income perspective. The REIT sector yields 3.4%, three times the S&P 500's historically stingy yield of 1.1%.
To highlight some of the market's best opportunities, we caught up with Ji Zhang, co-manager of the $2 billion Cohen & Steers Global Realty Shares fund, which has returned 5.6% over the past 10 years in a difficult market for real estate stocks that saw values tumble sharply when the Federal Reserve hiked interest rates in 2022. While the sector may have struggled, the fund has been a standout in its category, finishing in the top 21% among real estate funds, according to Morningstar.
Zhang is also co-manager of the Cohen & Steers Real Estate Active exchange-traded fund, which launched last February. Zhang says both teams start by putting their own valuation on a REIT's real estate portfolio, looking for properties the market may have mispriced. They then apply a traditional financial analysis, looking for stocks with growing cash flows that should allow them to cover and increase their dividends.
One place Zhang sees value today is in the REIT market's own piece of the artificial-intelligence play -- data-center REITs, specifically Digital Realty Trust. While most AI-adjacent stocks surged in the past 12 months, Digital Realty has returned just 4%. Zhang sees this is a feature, not a bug.
"The company stayed disciplined," she says, noting Digital Realty continued its focus on established data center markets, especially Northern Virginia, rather than chase deals in riskier up-and-comers like Ohio, Missouri, and West Texas. While Digital Realty may sacrifice speculative growth today, the company is well positioned if and when an AI shakeout finally comes. "We want them to build a portfolio that is concentrated in a market with strong, durable demand," she says.
Digital Realty is relatively pricey for a REIT -- trading at 21 times forward FFO, but it boasts a solid 2.9% dividend yield. Analysts forecast solid but unremarkable FFO growth of 7% to 11% over the next three years.
Empire State Realty Trust is another underappreciated stock with plenty of upside. The REIT, which owns the Empire State Building and other properties in New York City, saw shares tumble 30% in the past year, as higher property taxes and operating costs ate into profits. It's also been a victim of the city's Trump-era tourism slump, since about 25% of its revenue comes from tickets to Empire State Building's famed observatory.
Zhang says the shares, which now trade at just eight times forward FFO, are due for a rebound. Many analysts think the market for prime Manhattan office space has turned a corner, with leasing activity up more than 30% during the first 11 months of last year, according to CBRE. "International tourism has probably hit a trough," Zhang adds.
Wall Street expects the REIT's profits to jump more than 45% in 2026, mostly erasing the declines from a forgettable 2025. The stock's yield, at a relatively modest 1.8%, looks safe considering its quarterly cost amounts to less than half the company's free cash flow.
Investors looking for something that's more powerhouse than turnaround story should check out senior housing REIT Welltower. Shares have shot up 40% in the past year and trade at 31 next year's FFO. They yield just 1.6%
The hype around the stock is justified, Zhang argues. Given the pace of baby-boomer retirements, senior living is guaranteed to be a growth area for years to come. Welltower's scale -- with a market capitalization of more than $130 billion -- gives it an advantage that's hard for competitors to match, be it the cost of capital or the ability to pour money into improving operations in a complicated business that blends real estate and healthcare.
"Because of their superior operating platform, they are able to acquire undermanaged senior housing assets," Zhang says. "They bring them onto their platform, improve the occupancy rates, and improve the operation."
Write to Ian Salisbury at ian.salisbury@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
February 04, 2026 01:00 ET (06:00 GMT)
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