With interest rates expected to come down in 2024, real estate — a sector beloved for its steady income payments — could see upside in the new year. The real estate sector in the S & P 500 ended 2023 with a gain of more than 8%, sharply underperforming the broad market index’s 24% advance. Rising interest rates were a drag on this segment of the market, as they not only raise the cost of borrowing for real estate investment trusts, but they also make the asset less attractive for income-seeking investors relative to Treasurys, for instance. Don’t forget that last year, investors could earn yields upward of 5% just by plunking money into a certificate of deposit or stashing it in a money market fund or Treasury bills. Now that the Federal Reserve has penciled in three rate cuts in 2024, REITs could see a pickup in investor interest, boosting their share prices in addition to the income. “I think REIT prices will go up if we have stable rates — you will have people rotate back into the sector,” said Morningstar analyst Kevin Brown. “When rates are low, a lot of income-oriented investors see that REIT dividend as very attractive, and they are willing to take the risks associated with equity investment to have this dividend payment.” Indeed, real estate was the top sector in the fourth quarter of 2023, up 17.6%, ending with a one-month pop of nearly 8% in December alone. The movements coincided with a period of substantial cooling for the 10-year Treasury yield, which topped 5% at its high in October and ended the year just over 3.8%. A keen eye The post-Covid trend of working from home and a slow return to the workplace have been a drag on office REITs. The Kastle Systems’ ” Back to Work ” barometer, which measures office occupancy in 10 major U.S. cities, stood at 51.1% on Dec. 18, down from 51.6% the prior week. Difficulties still loom for office REITs in 2024, according to Jefferies, but conditions are expected to improve. “While we expect [occupancy] declines across roughly half our coverage in ’24, we expect the pace of declines to slow, which should provide a tailwind for sentiment,” analyst Peter Abramowitz wrote in a Monday report. Jefferies is neutral on the office REIT sector but has raised its rating on Boston Properties to buy from hold. BXP 1Y mountain Boston Properties’ performance over last 12 months “We see BXP as an attractive play for relative multiple expansion vs. peers, given its status as an industry bellwether, with one of the highest-quality portfolios in the space and stability in its earnings outlook,” the firm said. Boston Properties benefits from its “modern portfolio” in the coastal office REIT industry, with the buildings having a weighted average age of 15.7 years, compared to 22.7 years for all public REITs, Jefferies said. In turn, that will lead to further stability in its occupancy outlook. Jefferies’ target price of $80 reflects 14% upside from Friday’s close. The stock yields 5.4%. Thirteen of the 21 analysts covering Boston Properties rate it a hold, and consensus price targets call for about 5% downside from here, according to LSEG, formerly known as Refinitiv. Spotting long-term trends Even as a lower rate environment is beneficial for REITs, Morningstar’s Brown sees one corner of the sector likely to get a long-term boost from emerging demographic trends: the senior housing and health 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 more than 6 percentage points from the pandemic low of 77.8%, but it’s still off from the pre-pandemic occupancy rate of 87.1%. At the same time, baby boomers are rapidly aging, with the oldest members of the cohort turning 80 in 2026. “That turns into demand for these facilities,” said Brown. He predicts that over the next three to four years, demand will outpace supply, “and that will translate to occupancy being back at pre-pandemic levels — and maybe exceeding that and getting into the 90% range.” To play that trend, Brown highlighted Welltower and Ventas . “I think they will see high growth for many years to come.” Welltower, which invests in senior housing operators, pays a dividend yield of 2.7%, while Ventas yields 3.6%. JPMorgan’s Anthony Paolone upgraded his rating on Welltower to overweight from neutral in December, pointing to Welltower’s disclosure of a “significant step-up in the pace of acquisition activity, with $3B closed through October and another $3B in process.” He also raised his 2024 year-end target price to $99 from $92, suggesting upside of nearly 10% 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 imply upside of more than 3% from current levels. Ventas received buy or strong buy ratings from 60% of the analysts covering the stock, with the average price target suggesting 2% upside from here. A dividend aristocrat in the spotlight For 2024, Morningstar’s Brown likes Realty Income , a triple net lease REIT. In a triple net lease arrangement, tenants are responsible for maintenance, rent, property taxes and insurance premiums. “They simply collect the rent check from their tenant, otherwise everything else about the property is on the tenant,” said Brown, noting that Realty Income’s tenants include pharmacies and gas stations. Realty Income pays a dividend yield of 5.3%. It is also a member of the S & P 500 Dividend Aristocrats, meaning it’s a stock that has increased its dividends in each of the past 25 consecutive years. “They are a steady rent collecting company, and that is good if we are going into a sort of potential slowdown or recession,” Brown said. Nearly half the analysts covering Realty Income rate it a buy or strong buy, calling for upside of more than 5%, per LSEG. — CNBC’s Michael Bloom and Chris Hayes contributed reporting.