With 2022 clearly a bear market for U.S. real estate investment trusts (REITs), 2023 can be described as an awakening bear. 

After declining 24% last year, the S&P United States REIT index is up 6% so far this year. Of course, with domestic equities vastly outperforming, the sector has been more of an afterthought. But for income investors, the timing may be right to tiptoe back into the high dividend asset class.

Despite generating record earnings last year, REITs limped into the new year with weak market sentiment because of economic uncertainty. Since inflation and rising interest rates typically discourage real estate leasing and development activity, investors have been reluctant to step foot into REITs. 

Meanwhile, the financial results of most REITs have held up pretty well. With commercial real estate the notable exception, strong balance sheets (with debt locked in at lower fixed rates) are helping real estate companies weather the storm. This could have them well-positioned for a strong recovery as economic pressures ease and building and renting become more affordable. 

Granted, with the Federal Reserve clinging to hawkish monetary policy, the pendulum may not swing until well into 2024, if not 2025. The good news — investors have an opportunity to get ahead of the potential turnaround by scooping up REITs at depressed valuations and attractive dividend yields.

Tread carefully, though, says Wall Street research firms who have been reluctant to announce across-the-board upgrades. Until there are clearer signs of a healthy operating environment, analysts say it's best to bunker down with ‘specialized’ REITs that have unique demand drivers. These three stocks are among the Street’s favorites.

What Is the Biggest Industrial REIT? 

The world’s largest industrial REIT, Prologis, Inc. (NYSE: PLD) owns and manages warehouses, manufacturing facilities and large-scale storage buildings. Exposure to e-commerce and B2B fulfillment has been a source of resilience and outperformance. But while the stock is up 10% year-to-date, it remains about 30% below its April 2022 peak. 

What Prologis lacks with a below-sector 2.8% dividend, it more than makes up for with 1) ten straight years of dividend growth (including through the pandemic) and 2) significant pricing power. Since its highly customizable warehouses are in sought-after locations, the company can charge premium rent.

Last quarter, this translated to 64% core funds from operations (FFO) growth. Since management raised its 2023 guidance a month ago, Wall Street sentiment has been overwhelmingly positive — 11 buys, 2 holds. 

Does American Tower Have Good Upside?

Analysts have been unanimously bullish on American Tower (NYSE: AMT) since the REIT’s second-quarter report. The wireless telecommunications tower leader raised its full-year adjusted funds from operations (AFFO) guidance for the second time amid steady leasing demand from wireless service providers, TV broadcasters and radio stations. 

American Tower is benefitting from the global shift to 5G networking. Higher interest rates have limited development activity due to the capital-intensive nature of constructing new towers. As such, Fed rate cuts will be a welcomed development. 

In the meantime, the REIT will lean on the long-term contracts of its existing base and a healthy global appetite for mobile data. A push into the data center market (boosted by the CoreSite acquisition) bodes well for diversified growth. 

The consensus price target on the stock implies around 25% upside. Tack on a 3.4% dividend that has been increased in each of the last 13 years, and the REIT could have a strong total return potential over the next 12 months. 

What Is Public Storage’s Dividend?

Public Storage (NYSE: PSA) is relatively flat year-to-date, which could mean the stock is stabilizing after a rough 2022. The self-storage REIT has been hurt by soft demand stemming from a weak housing market and consumer reluctance to spend on non-essentials. And since self-storage facilities popped up everywhere during the hot housing market of 2021, oversupply concerns have also weighed on the group. 

Fortunately, there is a light at the end of the tunnel. A cooling labor market led by mass layoffs at Microsoft, Oracle and other tech giants could point to a less aggressive Fed in the months ahead. If mortgage rates begin to moderate, prompting the housing market to loosen up, more people will be on the move and need self-storage.

Even with elevated supply, self-storage operators will probably be able to raise their prices. And if cost inflation simultaneously cools, self-storage REITs will bank even higher profits than their ignored record profits of last year.

An improving profit outlook has analysts slowly warming up to Public Storage. A few weeks ago, UBS raised its price target to $309. The Street’s average target of $329 equates to a 15% price return to go along with a 4.2% forward dividend. Earlier this year, Public Storage hiked its dividend for the first time since 2016 to the tune of 50%. The move likely signals better times ahead — and an opportunity for investors to secure a solid long-term cash stream.