CHICAGO—“Healthy underlying operating performance” is a general theme as Morningstar Inc. surveys the US REIT universe in early 2018. However, equity analyst Brad Schwer also sees caution as a general watchword for investors entering that universe.

“Historically high asset prices for existing, stabilized institutional real estate is forcing the hand of many US REITs to focus on new development and redevelopment opportunities,” Schwer writes in an outlook report on real estate stocks. “Although we still acknowledge the opportunity for prudent capital allocation to achieve excess returns, we are cautious of firms overextending themselves into riskier investments.” That being the case, Schwer writes that the best bets for investment are “reasonably leveraged companies with solid prospects for long-term growth that can weather the natural cyclicality of the real estate markets.”

At present, Morningstar's real estate coverage is trading at a 4% premium to the rating agency's fair value estimates, compared to a 7% discount when Morningstar issued its 2017 outlook report a year ago. That means attractive investment opportunities scattered across asset classes; two that stand out in Morningstar's global view are Vornado Realty Trust in the US office sector and CapitaLand Mall Trust in Singapore retail.