Rising inflation and interest rates have placed significant pressure on several sectors, particularly real estate. But some market watchers think that could change. “I think it would be an opportune time to invest in real estate, especially given that we expect interest rates to decline over the next 12 months,” according to Kevin Brown, senior equity analyst at financial services firm Morningstar. He suggests that investors try to have 10% of their portfolio exposed to “real estate in some form, as a good rule of thumb.” “Such exposure can come from REITs [real estate investment trusts] or direct ownership, or other real estate investments if you are a large investor. But REITs represent a great, easy opportunity for an asset class that would otherwise be difficult to invest in. With the expected rate cuts, I expect REITs to outperform the broader U.S. market this year,” Brown told CNBC Pro on Feb. 14. Rick Romano, Head of Global Real Estate Securities at PGIM Real Estate is d deal, saying that REITs offer investors “a unique and fantastic opportunity” to invest across different geographies and segments right now. Picking Commercial Properties One segment Brown likes is tenant-occupied commercial properties like pharmacies , retailers, food outlets and gas stations.The diversity — and the fact that tenants sell essential goods — means they are not overly sensitive to economic conditions and can post gains even in a recession, Brown said , naming Realty Income a REIT to consider.Realty Income says its portfolio includes more than 13,000 commercial properties with an occupancy rate of 98.8%. “Realty Income has a triple net lease structure, meaning its tenants are responsible for everything, [namely] all expenses that may be generated by the property. They are also a conservative tenant with low rents relative to the revenue the tenants generate, so there is a very low risk of them not receiving rent,” Brown said. He also flagged the company as part of the S&P 500 Index Dividend Aristocrat and has increased its dividend payout for 25 consecutive years. The REIT has a 5-year average dividend yield of 4.5% and trades at about a 10% discount to net asset value – a key measure of the value of a REIT – according to FactSet data. Data Center Boom In addition to commercial space, PGIM’s Romano sees opportunity in data centers and expects a supply shortage in 2023-2024, “coinciding with this sharp spike in demand due to AI right now. “We see some of the best growth rates in real estate,” he added. Among the data center-focused REITs that Romano’s PGIM Global Real Estate Fund invests in are Prologis (8.1% of the fund as of December 2023) and Equinix (5.3% of the fund) Prologis, which owns nearly 800 properties in across the globe, including numerous data centers, trades at a premium of approximately 4% to net asset value. Equinix, with 250 data centers, trades at a premium of about 17% according to FactSet data. Buying senior housing? Morningstar’s Brown highlighted the senior housing market as a segment to watch, particularly in the U.S. as the baby boomer generation ages. “We will have very high demand growth,” he said, noting that the Covid pandemic has reduced construction activity and, as a result, supply is not keeping pace with employment levels. REITs he likes include Ventas – which has more than 1,400 properties including senior living facilities and outpatient medical buildings in the US, UK and Canada – as well as Welltower, which has exposure to senior housing, outpatient care facilities and care spaces. “Ventas, in particular, is trading at a very deep discount,” Brown noted. “Both names fit into the larger theme of senior housing.” According to FactSet, Ventas trades at a discount of about 3% to its net asset value, while Welltower trades at a premium of about 55%.