"There was a general belief that the trend could not continue," McNeela says.
Economists were also lukewarm on their projections for the economy, with the prevailing view that the economic recovery would continue to progress slowly, putting another speed bump in the path of the real estate bandwagon.
As it turns out, the analysts were partly right. Although the economy in general performed better than anticipated, the fundamentals of the real estate sector were relatively weak, particularly in the apartment and office space sectors. That, however, didn't deter investors, who adopted a very forward-looking mentality when it came to real estate.
As it was in the equity market, the investment activity in real estate became a rising tide that lifted all boats. Even the moribund apartment real estate sector, where earnings continued to suffer in the face of low interest rates, investors saw an average return of about 25%. REITs specializing in office space, where vacancy rates are still high, saw an average gain of 34%. And even the lodging sector, in the doldrums since the September 11 terrorist attacks, saw a gain of nearly 32%.
Average dividend yields dropped from 7.32% to 5.75%, partly due to lowered earnings, but overall it was a year in which it was hard to go wrong in the real estate sector. In terms of total market capitalization, the Composite NAREIT Index increased to $224 billion at the end of 2004, up from $162 billion a year earlier.
Where does that leave the real estate landscape for 2004?
In some ways, pretty much where it was at the end of 2003-sort of waiting for the other shoe to drop. Grupe of NAREIT says the association's surveys indicate that analysts are generally predicting returns of between 0% and 12% for 2004. At least one, he says, is forecasting negative 5% for 2004. The general consensus seems to be that there was a gap between the fundamentals and the share prices in real estate last year. While no one is ready to utter the word "bubble," the general belief is that portions of the real estate sector are due for a landing.
"The outlook for this year seems to be pretty much the outlook we had last year," Grupe says. "The point being, it's very hard to be able to predict what these sectors are going to do."
But based on poor fundamentals in sectors such as apartments and offices, investors have very good reason to be cautious, says Samuel A. Lieber, founder and portfolio manager at Alpine Funds. Lieber feels that the main propellant fueling the real estate market the last few years has been low interest rates, both in terms of supply and demand, as many real estate companies have been able to restructure debt and expand. "It doesn't get better than this right now," he says.
Lieber sees real estate share prices peaking over the next six months, particularly if there is a rise in interest rates. That means, he says, that a blanket approach to real estate investing could be risky in 2004, as individual company performance will have more of an impact.