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  • CFRA raised its rating on the SP 500 Real Estate sector to marketweight from underweight on Friday. 
  • The investment research firm said REITs are a strong hedge against inflation, which has kicked up to a 41-year-high of 8.5%. 
  •  The sector has declined this year with investors concerned about a potential recession. 

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It's time to consider buying real estate stocks, in part as a hedge against inflation that's recently scaled up to a 41-year high, investment firm CFRA said Friday in upgrading the sector.

The SP 500 Real Estate sector has dropped about 3% so far this year but is outperforming the broader SP 500 index, which tilted again Friday toward correction territory, or a loss of 10% or more from recent highs. 

In a note, CFRA raised its recommended exposure to the sector to marketweight from underweight but did not name individual stocks in its ratings change. The sector includes real estate management and development services. 

Real estate investment trusts, or REITs, are "a strong inflation hedge, with sub-industries that issue short-term leases able to adjust quickly to rising prices," wrote Sam Stovall, chief equity strategist at CFRA. US inflation in March accelerated to 8.5%, the fastest increase since December 1981, led by sharper prices for gas, shelter and food.

REITs can benefit from price increases for rents and from higher real estate values during hotter inflationary periods. But REIT stocks have been volatile this year, said Stovall. 

"This volatility has been further amplified recently with the yield curve inversion signaling an increasing likelihood of a recession in 2022 or 2023," he said. 

Yields on US Treasurys have climbed this year as investors price in expectations for the Federal Reserve to aggressively raise benchmark interest rates to tamp down on inflation. Shorter-dated bond yields, which are most sensitive to interest rate changes, have been rising above those on some longer-dated government bonds, indicating heightened worries about the economy. 

REITs collectively owned more than $3.5 trillion in gross assets across the US,  according to industry group Nareit.

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