Rising interest rates are a headwind for real estate investment trusts. But some stocks in this high-yielding sector may still be winners.

It has been a difficult period for real estate stocks, with elevated interest rates, dismal demand for corporate office space and a snarled housing market. This was supposed to be a comeback year with the Fed easing interest rates as inflation cooled.

Instead, interest rates have been spiking with the 10-year Treasury yield close to its two-year high. Year to date real estate stocks are up 13%, more or less in line with the market. But in the past month they are down 0.4%, as interest rates surged.

For income investors, the sector, which yields 3.1%, compared with just 1% for the S&P 500, could still be attractive, says Jeff Kolitch, manager of the $2 billion Baron Real Estate fund, which has returned 11% a year on average over the past decade, ranking in the top 2% in its category, according to Morningstar.

Real estate stocks currently trade at just under 18 times forward funds from operations, according to FactSet, well below their Covid-era high of more than 24 times and the S&P 500's P/E of around 20.

One area of growth for REITs is data center properties. Shares of the subsector's biggest players Equinix (up 40%) and Digital Realty (up 25%) have both rallied this year. A less well-known name investors should consider, according to Kolitch, is Blackstone Digital Infrastructure Trust.

The REIT, managed by private asset giant Blackstone, raised $2 billion in an IPO in May. Its strategy is to invest in established, income-generating data centers leased to hyperscaler tenants in the U.S. market. That could make it less risky than other data center REITs, which focus on developing new projects, says Kolitch.

Another pick is shopping mall company Macerich. Shipping malls are no longer the cultural force they were in the 1990s. But the company, whose stock yields 2.7%, focuses on the highest performing Class-A properties, which tend to own luxury stores for affluent shoppers.

Kolitch touts the efforts of CEO Jackson Hsieh to upgrade Macerich's portfolio. Shares have returned 63% since Hsieh took over in the spring of 2024, while the real estate sector as a whole has returned just 24%.

$Public Storage(PSA-N)$ is the leader in self-storage, a subsector that is still struggling with a postpandemic hangover. Kolitch argues the stock, which yields 3.7%, represents a solid business poised for a rebound. He sees storage as fundamentally tied to the housing-since moving house often prompts the need for a storage locker.

When will the moribund housing market improve? "We don't predict when it's going to normalize," he says. "Given broad economic growth, we don't think it's going to get much worse from here. Any positive inflection is going to have a positive impact on the stock."