- The Washington Times - Friday, January 3, 2003

Trying to track the movement of real estate stocks in 2002 was like watching the cars on a roller coaster. Shares of real estate investment trusts, or REITs, slowly climbed to new heights early in the year, dropped quickly, rose again, then fell before finally settling back about where they began.
It was an unusual amount of activity for REIT stocks, which long have been considered stable investments, immune to the ups and downs of the mainstream markets.
During the first five months of 2002, REIT stocks fared well, and analysts and investors turned to them, seeing real estate as a solid alternative to most stocks that were tumbling in value. But by early July, REIT stocks fell too, as companies reported lower revenues from their properties and talked of cutting their prized dividends to preserve cash.
To illustrate the unusually volatile activity of REIT stocks throughout last year, consider the Morgan Stanley REIT Index, which tracks 114 of the most heavily traded REITs and is used as a guide by most stock analysts.
The index began the year valued at about 413 points and soared 12 percent to a 52-week high of 471 points by April 12. But by the end of July, as second-quarter earning reports trickled in, the index had tumbled more than 20 percent, hitting a 52-week low of 373.
In 2001, the Morgan Stanley REIT index rose gradually, never dropping more than 3 percent on any one day, except for Sept. 18, the first day of trading after the September 11 terrorist attacks. In 2002, though, the index rose or fell 3 percent on four occasions.
Despite the unexpected volatility, analysts said, it was a good year for REIT stocks overall. Why? Because by year's end, stocks had climbed back to and even passed the level at which they started. Investors got back into the practice of buying REITs toward the end of the year, because prices were low and companies backed off speculation that they might cut dividends.
"It was actually a great year for REITs," said Richard Moore, a real estate analyst with McDonald Investments in Cleveland. "They far outperformed the S&P; 500 and the Dow Jones Industrial Average."
Indeed, while the Morgan Stanley REIT Index rose about 3.6 percent on the year, the S&P; 500 finished the year down 23.37 percent and the Dow fell 16.76 percent. In the Washington area, the story is the same, with most REITs giving positive returns and keeping dividend levels steady. Consider the following local REITs and their performances this year:
Corporate Office Properties Trust rose $2.16, or 18.2 percent.
Federal Realty Investment Trust rose $5.05, or 21.9 percent.
Criimi Mae rose $7.16, or 152 percent.
Mills Corp. rose $2.86, or 10.8 percent.
Analysts, though, have looked ahead to this year and don't like what they see. Most predict down years for office and apartment REITs, as vacancies in buildings continue to rise in many big markets. With interest rates low, few people will fill luxury apartments, preferring to buy instead. Slow job growth is likely to mean few new tenants to fill office space, analysts said.
"The REITs are going to have a tough year," Mr. Moore said. "The weak job market and weak job growth are going to kill these guys."
What's more, prospects for REITs may not improve until well after the economy rebounds, because it will take time for interest rates to rise and for companies to increase staff measurably.
"Real estate fundamentals remain weak and should not materially improve during '03 since real estate is a 'late-cycle' sector," Merrill Lynch real estate analyst Steve Sakwa said in a year-end research note.
Property Lines runs Fridays. Tim Lemke can be reached at 202/636-4836 or [email protected]

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