BofA Securities analysts led by Jill Carey Hall see small cap real estate investment trusts (REITs) as offering "the highest distribution yield of any small cap sector" in a deep-dive into the real estate space ahead of the BofA Real Estate Conference this week.

"We have continued to highlight the importance of dividends in the current backdrop, where we have seen wide performance spreads between dividend payers vs. non-payers with small caps, and dividend yield has been the best stock selection factor within small caps year-to-date," they wrote in a note to clients.

REIT fundamentals remain solid and demand healthy across most sectors, with office the notable exception. Strongest pricing power is in industrial, residential, self-storage, and shopping centers, they said.

With companies looking to gain more control over supply chains, "the case for reshoring/supply chain localization continues to strengthen, and we see evidence reshoring is occurring," the analysts said. "This should benefit SMID (small- to mid) caps broadly, which are tethered to U.S. capex cycles."

Industrial REITs stand to benefit the most with the increasing demand for space. REITs exposed to warehouse marketing in manufacturing hubs include EastGroup Properties (NYSE:EGP ), LXP Industrial Trust (NYSE:LXP ), and STAG Industrial (NYSE:STAG ), the analysts said.

The U.S. economy appears to be in a late-cycle phase, which has historically been the best phase for the both small and large cap, with real estate outperforming more than 60% of the time in small caps and more than 70% of the time in large caps, Hall and colleagues said. Small cap real estate tends to lag large cap real estate in the late cycle.

But moving into a downturn, small cap tends to outperform large cap in real estate. BofA's analysis showed that apartments and retail as the most defensive real estate sectors and office and industrial as the least defensive.

BofA analyst Jeffrey Spector's top picks for the sector include UDR (NYSE:UDR ), Rexford Industrial (NYSE:REXR ), Corporate Office Properties Trust (NYSE:OFC ), Federal Realty Investment Trust (NYSE:FRT ), and American Homes 4 Rent (NYSE:AMH ).

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SA contributor Ross Bowler also likes EastGroup Properties (EGP), saying it's the "exceptional operator it has been for the last 20 years."