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Real Estate Investment Trusts
REITs are investment vehicles that trade like stocks or bonds.

Looking at the REITs and the various real estate sectors can help understand the underlying real estate trends we work with.

REITs have spent the past year raising money. All the sectors have been seriously damaged and therein lies the

opportunity. REITs that have been able to raise money are positioned for opportunistic buys. Cash heavy REITs wont have to rely on banks for loans and are waiting for banks have to unload non performing loans.These are going to be the winners here as some banks can no longer hold back on foreclosures. Stock market investors will often try to pre position themselves, to buy before the rest and hope to reap greater profits. They arent always right and they can certainly be too early.

REIT Sector Performance

1. Regional Shopping Malls: Up 11.9% in February
2. Shopping Centers: Up 8.9%
3. Apartment Sector: Up 8.4%

Given that many of these same sectors dropped 20-25% this time last year, its another sign that investors are beginning to think the worst may be over. According to the recent Price Waterhouse survey: many commercial real estate investors who held investments, overleveraged, or bought late in the cycle now face struggles because 2010 is expected to present many challenges as capital remains limited, rents continue to decline, and vacancies. But even with these snags, the firm says next year will be a great time to buy commercial real estate assets.

The Price Waterhouse survey goes on to note that Next year should open the gates on distressed properties as more community and regional banks fail and the Federal Deposit Insurance Corp. sells their assets. Surviving banks will keep their best performing commercial real estate loans alive but foreclose on the rest as their loan-loss cushions allow. Sounds like bottoming to me...

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Real-estate investment trusts sold $24 billion in new stock last year, raising to profit from commercial-property distress by picking up high-quality real estate at bargain prices. But they are having trouble finding deals. Tishman Spier, recently handed the keys back to the banks. Peter Cooper village and Stuyvesant Town comprise 56,000 units. Another 2.6 billion dollar deal was handed back to Barclays and they have no intention of putting these properties up at bargain basement prices. They are looking past the problem waiting for better days. see chart

So, REITs bought only $4.6 billion of property in 2009, a 67% decline from the previous year, according to research firm Real Capital Analytics. They cant get prime properties on the cheap. After dumping so much residential property on the market, driving prices down and gathering much evil eye for doing that, they learned a lesson.

Why

Commercial property prices some 35% to 50% off their peaks, most banks are keeping their best assets off the market. Many REIT expected the number of distressed buildings forced to market to surge as owners defaulted and lenders foreclosed. But while the number of problem loans has been growing, so far this hasn't translated into many fire sales. Finally there are some signs of an end to the equity drubbing taken by commercial real-estate owners.

From a cash-flow perspective, REITs still face declining rents and occupancy levels and equity evaporation. The REITs raised so much money waiting for the banks to hand off quality properties on the cheap and instead, they are going to manage and hold property. This may not be the generational opportunity the REITs expected. but I think it speaks volumes about how the world has changed for the better. Suddenly, there is a view that better times are coming.

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