- The Washington Times - Sunday, January 4, 2004

Real estate stocks gave a boost to investment portfolios in 2003, but empty apartments and office space in many cities could dampen returns this year, analysts said.

Shares of real estate investment trusts, or REITs, produced returns as high as 40 percent last year with some D.C.-area companies leading the way. Analysts said many investors turned to REITs to diversify their portfolios and gain extra income from dividends, but high vacancy rates may cause REIT stocks to become depressed in 2004.

“There is now some concern about REIT valuations in some quarters,” said Keith Pomroy, a senior analyst with SNL Financial LC in Charlottesville.

The Morgan Stanley REIT Index — which tracks the most actively traded REIT stocks — rose about 150 points, or 36 percent, in 2003, outperforming the S&P; 500 for the third consecutive year. The index rose 3.5 percent in 2002.

REITs are public companies that develop and buy office, retail or residential space, earning income from rent and leases. The stocks offer individuals the opportunity to invest in real estate without buying properties.

D.C.-area REITs performed among the best in the nation in 2003. Shares of Columbia, Md.-based Corporate Office Properties Trust climbed more than 50 percent, from $13.92 to $21. Shares of Rockville-based Federal Realty Investment Trust rose 35 percent, from $28.35 to $38.55.

Some analysts said the rise in REIT stocks stemmed from greater confidence in Wall Street and more awareness of REITs as a investment option.

The National Association of Real Estate Investment Trusts and other industry groups have long advocated for the addition of REITs to investment portfolios, because they tend to remain stable while the markets fluctuate. Furthermore, as is required by law, most REITs pay out at least 90 percent of their net income in dividends, rather than pay corporate income tax.

Analysts cautioned that some REITs were paying unusually high prices for office buildings, many of which had high vacancy rates. In the D.C. area, for instance, buyers of office buildings paid a record $237 per square foot, or about 12.7 percent more than last year. Meanwhile, the amount of empty office space rose from 8.4 percent to 8.9 percent in 2003.

Some economists said better job growth could help fill office space and lead to better profits for REITs. Others have suggested that investors will move away from high-dividend stocks such as REITs and concentrate on blue-chip growth stocks.

“If our current prognosis for the economy remains unchanged, with some decent [gross domestic product] growth from here and moderate job growth at least in the second half of next year, we would argue that the [S&P; 500] is likely to outperform the REITs,” Morgan Stanley analyst Greg Whyte said at a recent round-table discussion organized by Real Estate Portfolio magazine.

Fitch Ratings said last month that it expects demand for commercial real estate to be weak in 2004, but that an improving overall economy will help free some companies of debt.

Wachovia Securities analyst Christopher Haley said he expected “a slower-to-respond office recovery” into this year, with a quicker rebound at the beginning of 2005.

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