The Best REITs to Buy

Real estate investment trusts, also known as REITs, typically offer high yields, making them appealing choices for income investors. The real estate stocks that Morningstar covers, as a group, look 13% undervalued as of June 4, 2024.

REITs are interest-rate-sensitive, which means they tend to outperform the broad market when interest rates fall and underperform when interest rates rise. During the trailing one-year period, the Morningstar US Real Estate Index returned 7.19%, while the Morningstar US Market Index returned 24.85%.

7 Best REIT Stocks to Buy Now

The REIT stocks below were trading at the largest discounts to Morningstar’s fair value estimates as of June 4, 2024.

1. Pebblebrook Hotel PEB
2. Kilroy Realty KRC
3. Park Hotels & Resorts PK
4. Macerich MAC
5. Healthpeak Properties DOC
6. Boston Properties BXP
7. Sun Communities SUI

Here’s a little more about each of the best REITs to invest in now, including commentary from the Morningstar analysts who cover them. All data is as of June 4.

Pebblebrook Hotel

• Morningstar Price/Fair Value: 0.57
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None
• Forward Dividend Yield: 0.28%
• Industry: REIT—Hotel and Motel

Pebblebrook Hotel continues to hold the first spot as the least expensive company on our list of the best REITs to buy, trading 43% below our fair value estimate of $25.50.

Pebblebrook Hotel Trust is the largest US lodging REIT focused on owning independent and boutique hotels. After Pebblebrook merged with LaSalle Hotel Properties in November 2018, the company owns 46 upper upscale hotels with more than 11,900 rooms, located primarily in urban gateway markets. Historically, Pebblebrook’s combined portfolio has had a higher revenue per available room price point and EBITDA margin than its hotel REIT peers.

The merger with LaSalle provided Pebblebrook with some new avenues to create value for shareholders. The company doubled in size while taking on only a portion of the general and administrative costs, making the combined company more efficient. Pebblebrook CEO Jon Bortz previously ran LaSalle and acquired many of the hotels in that portfolio. His knowledge of those hotels combined with management's demonstrated ability to maximize margins should allow him to implement cost-saving initiatives that drive up margins.

The coronavirus pandemic hit the operating results of Pebblebrook's hotels significantly with high-double-digit revPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations across the country allowed leisure travel to recover quickly, leading to significant growth in 2021 and 2022. Growth decelerated in 2023, though the company continues to report improving occupancy and rate growth for most of the portfolio. We think Pebblebrook should continue to see solid growth as renovations executed across its portfolio were finished in late 2023 and early 2024, which should help drive high revPAR growth.

However, several factors will remain headwinds for hotels over the long term. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing a hotel from pushing rate increases even though it is nearing full occupancy on many nights. Last, while the shadow supply created by Airbnb doesn’t directly compete most nights, it does limit Pebblebrook's ability to push rates on nights when it would have typically generated its highest profits.

Kilroy Realty

• Morningstar Price/Fair Value: 0.57
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None
• Forward Dividend Yield: 6.46%
• Industry: REIT—Office

Kilroy Realty is also 43% undervalued relative to our $59 fair value estimate. This cheap REIT stock operates in the office industry and offers a 6.46% dividend yield.

Kilroy is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, the San Francisco Bay Area, Seattle, and Austin, Texas. It owns 121 properties consisting of approximately 17 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and a future development pipeline. We also welcome management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients.

Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest-quality real estate in technology and life science market clusters. The quality of its portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers.

Economic uncertainty emanating from the pandemic recovery and remote work dynamic created a challenging environment for office owners. Employees are still hesitant to return to the office as office utilization remains around 50% of the prepandemic level. The vacancy rates in the Los Angeles and San Francisco office markets were recorded at 23.9% and 32.5%, respectively, in the fourth quarter of 2023. The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains materially negative as of fourth-quarter 2023, and rental growth figures are disappointing, especially given the inflationary environment.

However, we are seeing an increasing number of companies requiring their employees to return to the office. In the long run, we believe that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining company cultures.

Park Hotels & Resorts

• Morningstar Price/Fair Value: 0.63
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None
• Forward Dividend Yield: 6.38%
• Industry: REIT—Hotel and Motel

This undervalued REIT stock operates in the hotel and motel industry. Park Hotels & Resorts yields 6.38% and trades 37% below our fair value estimate.

Park Hotels & Resorts is the second-largest US lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all its international hotels and 23 lower-quality US hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complementary portfolio of 18 high-quality, upper-upscale hotels that should help to diversify Park’s hotel brands to include Marriott, Hyatt, and IHG hotels.

The coronavirus pandemic hit the operating results of Park’s hotels significantly, with high-double-digit revPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations across the country allowed leisure travel to recover quickly, leading to significant growth in 2021 and 2022. Growth decelerated in 2023, though the company continues to report improving occupancy and rate growth for most of the portfolio. We think the company should continue to see solid growth as renovations completed in 2022 and 2023 drive revPAR growth above industry average for several years and allow for operating margins to slightly exceed the levels the company achieved in 2019.

However, the hotel industry will continue to face several long-term headwinds. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing Park from pushing rate increases. Last, while the shadow supply created by Airbnb doesn’t compete directly with Park on most nights, it does limit Park’s ability to push rates on nights where it would typically generate its highest profits.

Macerich

• Morningstar Price/Fair Value: 0.63
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None
• Forward Dividend Yield: 4.47%
• Industry: REIT—Retail

Next on our list of the best REITs to invest in now, Macerich operates in the residential industry. This cheap REIT stock trades 37% below our fair value estimate of $24 per share.

Macerich has successfully repositioned the company over the past decade as a true owner and operator of Class A regional malls. Over the past 13 years, the company has sold over $4 billion in mostly lower-quality assets, either directly owned or owned through joint ventures, and recycled the capital into acquiring new Class A malls, buying out its partners’ share in the unconsolidated portfolio or redeveloping its own portfolio. As a result, the company’s portfolio should produce higher tenant sales productivity, occupancy levels, and rent and therefore is much better-positioned to face the economic headwinds of e-commerce. We expect Macerich to continue improving its portfolio through redevelopment, opportunistic acquisitions, and asset sales, which should deliver strong earnings growth for Macerich over time.

Macerich's moves to improve its portfolio quality were necessary to position the company for the omnichannel strategy many retailers are pursuing. E-commerce continues to pressure brick-and-mortar retail as consumers increasingly move their shopping habits online. Macerich exited the assets that are likely to see falling sales growth and occupancy levels as e-commerce takes market share. Although many retailers will look to reduce their store count over the next decade, the high foot traffic and sales productivity of Class A malls that now make up Macerich's portfolio continue to make them attractive places for retailers to place stores.

Fundamentals for the Class A malls in Macerich's portfolio have almost fully rebounded from the coronavirus pandemic. While shopping at brick-and-mortar locations fell as some consumers shifted purchases to e-commerce platforms in 2020, foot traffic has since returned to prepandemic levels, leading to a recovery in sales growth. Macerich's revenue is protected by long-term leases, and while occupancy fell to 89% in 2020, it has almost fully recovered. We believe that Class A malls will remain dominant in brick-and-mortar retail with high-quality malls eventually returning to their prior occupancy and rent levels.

Healthpeak Properties

• Morningstar Price/Fair Value: 0.65
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: None
• Forward Dividend Yield: 6.08%
• Industry: REIT—Healthcare Facilities

Healthpeak Properties is 35% undervalued relative to our $30.50 fair value estimate. This affordable REIT stock focuses on healthcare facilities and offers a 6.08% dividend yield.

The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well-positioned to take advantage of these industry tailwinds.

Given the significant challenges that the coronavirus presented to the senior housing industry, Healthpeak made the strategic decision in 2020 to dispose of most of the company’s senior housing assets in multiple transactions for around $4 billion in total proceeds. As a result, Healthpeak’s life science and medical office portfolios are now prominently featured in the company’s portfolio as the proceeds from the senior housing sales were reinvested into these two sectors. Healthpeak has high-quality assets in top markets that attract credit-grade tenants in both segments, so we believe it makes sense to strategically focus the company on the segments where it has an advantage. The company also completed a merger with Physicians Realty Trust in a $5 billion deal that closed in March 2024, adding 16 million square feet of high-quality medical office buildings that complement the company’s own portfolio. Despite the possibility of further changes to the ACA, we think any changes will still result in a coordinated value- and outcome-based system that will provide Healthpeak’s current portfolio with strong tailwinds.

Boston Properties

• Price/Fair Value: 0.66
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None
• Forward Dividend Yield: 6.54%
• Industry: REIT—Office

Boston Properties, operating in the office industry, is 34% undervalued. We think this REIT stock is worth $91 per share.

Boston Properties develops, owns, and manages Class A office properties that are mainly concentrated in six markets: Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. It owns over 191 properties consisting of approximately 53 million rentable square feet of space. The company has positioned itself to benefit from the burgeoning life sciences sector, as it owns approximately 5.5 million square feet of life sciences space and has an additional 5.8 million square feet of future development potential.

The company’s strategy is to develop and own premier properties that maintain high occupancy rates and achieve premium rental rates through economic cycles in supply-constrained markets that have the strongest economic growth and investment characteristics for office real estate. Management has also outlined its policies on capital recycling to ensure continuous portfolio refreshment and value creation while maintaining a strong balance sheet and having adequate access to capital to take advantage of opportunistic situations. We also welcome management’s focus on ESG as it aligns its office portfolio to meet clients' sustainability requirements.

The economic uncertainty emanating from pandemic recovery and the remote work dynamic has created a challenging environment for owners of office real estate. Employees are still hesitant to return to the office; office utilization remains at approximately 50% of the prepandemic level. The net absorption rate remains negative in 2023, and rental growth figures remain disappointing, given the highly inflationary environment. Having said this, we are seeing an increasing number of companies requiring their employees to return to the office. In the long run, we believe that remote work and hybrid remote work will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Sun Communities

• Morningstar Price/Fair Value: 0.69
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: None
• Forward Dividend Yield: 3.18%
• Industry: REIT—Residential

Sun Communities rounds out our list of the best REITs to buy. Although it is one of the most expensive REITs here, Sun Communities still looks undervalued as it trades 31% below our fair value estimate of $172.

Sun Communities is a residential REIT that focuses on owning manufactured housing, residential vehicle communities, and marinas. The company has grown significantly over the past decade after spending $11.8 billion since 2010 to build a portfolio of 666 properties from just 136 at the end of 2010. Sun targets owning properties that are desirable as second homes or vacation properties with nearly 50% of the portfolio located in either Florida or Michigan near major bodies of water.

Sun Communities mainly collects rental income from tenants. The tenants own their own manufactured homes, residential vehicles, and boats, but then pay Sun for the right to place their home or park their vehicle in the community. The rental income is consistent through the year for the manufactured housing portfolio and RV properties with annual memberships, but there is significant seasonality to the transient RV properties and the marina portfolio. Sun Communities also collects revenue from the sale of manufactured homes and provide services to the communities, though these activities represent a much smaller portion of the company’s total EBITDA.

The sector has benefited from an aging population with a desire to own a second home or have the time to go on regular vacations. The growth in the over-60 population over the past decade has supported rent growth that exceeds both inflation and the average rent growth reported by the multifamily REIT sector. While we anticipate that the continued growth of this demographic will support continued rent growth above inflation, we believe that much of the demand growth will be offset by the baby boomer generation starting to turn 80 within the next few years, which is when we believe that people age out of the target demographic for manufactured housing. Additionally, the transient business declined in 2023, leading to same-store revenue growth decelerating from the 2021 highs, a trend that we anticipate will continue in 2024. Therefore, while we believe that internal growth will remain solid for the next several years, we don’t think it will match the heights the company achieved over the past decade.

More About REIT Investing

Investors who’d like to extend their search for the best REITs can do the following:

• Review Morningstar’s comprehensive list of real estate stocks to investigate further.
• Use the Morningstar Investor screener to build a shortlist of REITs to research and watch.
• Read the latest news about notable REITs from Morningstar’s lead real estate analyst Kevin Brown.