2 REIT Stocks You Can Buy Right Now Before They Surge Even Higher

The Federal Reserve increased interest rates to help fight inflation, but there are always side effects from such moves. In the case of real estate investment trusts (REITs), the side effect was a deep drawdown across most of the sector.

But Wall Street doesn’t go in a straight line, it follows a path that more closely resembles a sine curve, and REITs began to rally toward the end of 2023 as interest rate worries began to ebb. There are still some interesting opportunities in the sector, including Prologis (NYSE: PLD) and Realty Income (NYSE: O).

Here’s why you might want to consider buying these two REIT stocks before they surge even higher.

Why are interest rates an issue for REITs?

Broadly speaking, interest rates can be problematic for REITs because REITs regularly have to tap the capital markets for growth capital. This isn’t exactly different from any other company, but it is more acute because REITs pay out most of their cash flow as dividends. This means that any growth investment, be it buying a property or building one, necessitates either selling debt or issuing stock. It simply got more expensive to be a REIT as rates moved up.

There’s another issue here as well since rising rates can lead to an economic slowdown. Or worse, tip an economy into a recession. For Prologis, which operates in the industrial space, and Realty Income, which has material exposure to retail assets, a recession could translate into weaker occupancy numbers and more difficult lease renewals. So that’s a second thing to consider here.

But those concerns start to fade if interest rates flatline or, as some now hope, begin to fall. Since Wall Street tends to be forward-looking, it boosted the shares of both of these stocks at the end of 2023 as anticipation began to build for a reversal in the Federal Reserve’s interest rate approach in 2024. Over the past three months, Prologis’ shares are higher by around 20% while Realty Income is up about 15%.

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There’s still more room to go

Those are pretty big gains in a very short period of time, so investors need to step back and take a closer look at what they are buying. For starters, Prologis is still off nearly 25% from its 2022 high with Realty Income down 27% or so from its 2020 peak. In other words, neither of these two REITs have fully recovered all of the ground they lost. That suggests that there could still be more upside from here. And it could be fairly substantial.

But the real attraction of these two REITs is their positions within the respective niches they serve. Prologis, with a market cap of $120 billion, is one of the largest REITs in existence. Realty Income, with a market cap a touch over $40 billion, is more than twice as large as its next closest peer. Cost of capital is a key point of differentiation in the REIT world, and both of these REITs have the size to more easily access the capital markets than their competitors. Then there’s the benefit…