Real estate finished November as the second best performing group in the S&P 500 Index adding 12%, trailing slightly behind tech’s 13% gain. The momentum was fueled by bets the central bank may begin cutting rates as early as next year.

In November, the interest-rate sensitive sector was a market outperformer as investors poured capital into the group. A pullback in Treasury yields has also supported trader optimism that the worst of it could be over. Additionally, US real estate investment trusts, which have been beaten-down by surging interest rates and economic uncertainty, are now flashing signs of strength.

The group rallied 12% in November versus the S&P 500’s 9% gain, notching its best month since 2011. Bank of America said it’s overweight the real estate sector ahead of 2024, with Jeffrey Spector calling the REIT sector equity’s “diamond in the rough.” He listed American Homes 4 Rent, Americold Realty Trust, Empire State Realty Trust, Kimco Realty Corp., Prologis Inc. and Welltower Inc. as his top picks in a note to clients Friday.

Battered office landlord stocks have placed a overcast on the REIT sector as a whole, though office only represents a sliver of the group. Investors have been fleeing the office sector as fears of remote work and elevated borrowing costs destabilize the sector.

“Real estate has seen the biggest de-rating since 2021 among all industries on concerns over office, but office is less than 5% of real estate’s market cap,” he said.

While Bank of America remains cautious on the market entering 2024, it still sees real estate as underappreciated.

For homebuilding stocks, the bulk of the monthly advance was made during the first three sessions of November after the Federal Reserve announced it would hold its benchmark rate steady for a second meeting. The index posted three back-to-back gains of more than 4%, ultimately sending the index to post its biggest monthly gain since 2020.

The recent pullback in mortgage rates is likely to further support the sector’s gains, enabling builders to buy down rates to 5.5%, a level that has previously helped demand, Bloomberg Intelligence analyst Drew Reading said.

“This would actually make new home payments more favorable versus resales heading into the spring selling season, so the timing is great for the group,” he noted.

Although builder confidence has been on the decline, Capital Economics US Property Economist Thomas Ryan says the sentiment is a misrepresentation of where larger public builders actually stand, as the gauge is largely comprised of smaller private builders.

As such, the typical strong correlation between NAHB homebuilder confidence and housing starts has broken down recently, he said. That divergence was underscored in November after the confidence gauge fell to its lowest level this year, despite housing starts unexpectedly rising to the highest in three months.

“While smaller homebuilders are finding it increasingly difficult to access the credit required to maintain construction activity, their giant competitors are in an extremely strong financial position,” Ryan wrote.

The real estate sector still lags behind the broader market year-to-date, but according to Bank of America, the group may be a bright spot heading into 2024.