Joseph Janiczek, a wealth manager in Greenwood Village, Colo., played the REIT market like a fiddle. He says he bought positions for clients during 1999 and 2000 (with some additional purchases afterward) when they traded at double-digit discounts and offered double-digit yields, and then sold off his entire position piecemeal in 2006 through early 2007 because he thought the sector was overvalued.

Janiczek wants to get back into REITs and says he's monitoring them closely, but he's not ready to take the plunge. "If the underlying real estate drops in valuation, that's more risk than we want," he says.

For some investors, the recent commercial real estate headlines--from pullbacks in new construction and falloffs in business office rentals to predictions that commercial real estate prices could fall--are yellow flags for REITs. There are differences between the public- and private-market values of real estate; conventional wisdom holds that REIT prices are leading indicators of where prices are going on the private side. Given the recent downturn in publicly traded REITs, some expect the other shoe to drop on the private side.

That remains to be seen. At the same time, some people argue that declines in REITs--and the mutual funds and exchange-traded funds that focus on that space--have already priced in the bad news and are looking ahead toward an economic recovery.

"If you know the REIT market and can use it effectively in a portfolio, it can be an attractive investment opportunity," says Kevin Mahn, chief investment officer at Hennion & Walsh, a broker-dealer in Parsippany, N.J.

One of his favorite REIT sectors is health care because of its long-term staying power. "It's a service sector that will never be outsourced and there will always be a need for it," he says. His top pick is Health Care REIT, whose portfolio includes senior housing, nursing homes, hospitals and other health-care facilities in 38 states. It produces steady cash flow, has a safe dividend north of 5% and generated total returns of 9% last year.

"We don't recommend that clients put a significant portion of their allocation in REITs," Mahn says, "but we like to see some exposure because they're negatively correlated to the general equity market and can outperform in certain periods."


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