Investing.com -- Jefferies upgraded three Sunbelt-focused real estate investment trusts or REITs, Camden Property (NYSE:CPT) Trust, Independence Realty (NYSE:IRT) Trust, and Mid-America Apartments to "Buy" from "Hold" given the improving supply trends and stronger rent growth in the coming years.

The slowdown in new apartment construction in the Sunbelt region, combined with strong job and population growth, should help boost rental income for these landlords. It expects a clearer improvement in the second half of 2025, with even stronger growth in 2026 and 2027.

A key challenge for Sunbelt REITs in recent years has been the flood of new apartments, which limited their ability to raise rents. However, Jefferies noted that future construction estimates have started to decline, easing concerns over excess supply.

New apartment supply forecasts for 2026 have been revised downward for key markets, including Charlotte, Atlanta, Phoenix, Houston, and Dallas. This should help stabilize rents and boost earnings for Camden, Independence Realty, and Mid-America Apartments.

Jefferies pointed out that these REITs have a history of setting conservative financial forecasts and then outperforming them. It believes that improving market conditions could lead to better-than-expected earnings in 2025 and beyond.

The firm also highlighted that tenants in these properties typically have rent-to-income ratios below 25%, making them less vulnerable to economic downturns compared to renters in more expensive coastal cities.

Jefferies sees an attractive entry point for these Sunbelt REITs, as their stock valuations remain at a discount compared to their peers in high-cost coastal cities. It set price targets of $139 for Camden, $24 for Independence Realty, and $190 for Mid-America Apartments.

While Jefferies remains cautious on NexPoint Residential (NYSE:NXRT) Trust due to its higher debt levels and exposure to lower-income renters, it believes the broader Sunbelt rental market is positioned for a strong recovery.

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