He likes multifamily housing companies that are operating in high-cost housing markets. "It's very difficult to buy a home in those markets and difficult to get the zoning to build more," he says. "That is a type of property that institutional investors continue to buy very aggressively." Statz, meanwhile, is less sure that the retail sector-where he feels activity has pushed prices too high-will have as strong a year in 2003.
Other sectors could also teeter either way in 2003, analysts say. The lodging industry, they note, is still trying to recover from September 11, and hasn't been helped by waning consumer confidence and the threat of war and continued terrorism.
Likewise, the office space sector-which has been weighed down by an overabundance of supply ever since the dotcom industry became the dot-bomb business-is in need of a prolonged stretch of job growth, analysts say. "Job growth is what will drive real estate fundamentals in a large way," says NAREIT's McAllister.
Beyond the cyclical changes in the market, however, some note that real estate investments seem to be more highly regarded by investors as a portfolio diversifier. A recent study by the Profit Sharing 401(k ) Council of America showed that 8.6% of 401(k) plans had a real estate option in 2002, which was up from 6.3% in 2001, McAllister notes. Among the companies that have added real estate to their 401(k) plans since 1999, he says, are Dow Chemical, Eastman Kodak, General Motors and Verizon.
There has also been a steady rise in the number of domestic real estate funds, with the number increasing to 154 in 2002 from 106 in 1999, according to Lipper, the research and analysis arm of Reuters. A recent development was TIAA-CREF's announcement that it would create a real estate securities fund based on the Wilshire Real Estate Securities Index.
The steady income stream that real estate can provide also has been seen as a boon in the current market, says Stephen Hamrick, managing director at W.P. Carey & Co. LLC in New York City. Since it was founded in the early 1970s, the firm has formed 14 real estate funds, all utilizing the same strategy: purchasing single-tenant corporate properties and leasing them back to the original owners in 15- to 20-year contracts. The funds have given investors annual dividend yields ranging from 5.22% to 19.86%.
"Independent advisors like this product because it's a means for their clients to derive income and good returns without being dependent on the traded markets," says Hamrick. "They use it as a stabilizer-a fixed-income alternative."
Neuberger Berman launched its real estate fund May 1 of last year. It started with $5 million in assets and grew to $25 million by the end of 2002, says fund manager Steve Brown. The fund, which finished the year down 0.46%, beat the performance of the NAREIT Composite index by 445 basis points during its eight months of operation last year, he says.
He attributes the fund's success to having been overweight in REITs that owned regional shopping malls and underweight in those that owned apartments. Brown says he's closely watching the warehousing sector in anticipation of an uptick in corporate earnings the last half of 2003.
All signs indicate the growth of the real estate securities market will continue, says Donald L. Cassidy, senior research analyst at Lipper. "I think investors will continue to view it as a safe haven, unless we have a really bad economy and start having stories about serious real estate vacancy problems and defaults on loans," he says.