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WHO'S AFRAID OF REAL ESTATE?

As REITs ''come of age,'' more investors are betting on bricks and mortar

Slow and steady. That's the best way to describe 1996, the fourth year of recovery in the commercial real estate market. Moderately strong economic growth, minimal new construction, and low interest rates are pushing rents up and metropolitan vacancy rates down, from 14.3% last year to a recent 12.8%. ''This is not a capital-driven recovery like we had in the 1980s,'' says Gary Beban, president of CB Commercial Real Estate Group. ''This recovery is being

driven by the user, and the developer is reacting accordingly.''
Indeed, real estate investment trusts (REITs) did extremely well in 1996. Total return for the year ended Nov. 29 was 30.23%, compared with 27.77% for the Standard & Poor's 500-stock index. Even the real estate mutual funds had good results; they were up 20.3% year-to-date through the end of November. With a three-to-five-year track record of healthy dividend growth, share price appreciation, good management, and access to capital, REITs are shedding their bad reps and attracting new investors such as pension funds.

BIG DOINGS. What's more, REIT capital is coming from a more disciplined Wall Street rather than the free-spending banks, insurers, and savings and loans. Also, insurance companies and pension funds are selling the real estate properties from the 1980s at attractive prices, making good acquisition opportunities for already existing REITs. ''REITs have decided that bigger is better,'' says Roger Johnson, national director of real estate for KPMG Peat Marwick. Take, for instance, the recent merger between regional mall developers Simon Property Group Inc. and Debartolo Realty Corp., which created the largest REIT, with a $4 billion market capitalization. And as the market capitalization increases, so does liquidity. ''REITs are coming of age,'' says Barry Vinocur, editor of Realty Stock Review.

For these reasons, market watchers are predicting a strong 12% to 15% total annual return for REITs over the next three to five years in certain sectors. Industrial and suburban office space is much further along in the real estate recovery cycle than, say, downtown office space and high-end hotels. Both of these sectors are expected to perform well in the upcoming year thanks to rollovers of office leases, tight supply for hotels, and little new construction, according to a report by Equitable Real Estate Investment Management Inc.

Kenneth Heebner, portfolio manager of CGM Realty mutual fund, has nearly half his portfolio in hotel REITs, including FelCor Suite Hotels. FelCor, owner of the premium brand Embassy Suites, acquires undermanaged hotels, upgrades them, and raises room rates under the Embassy Suites name. It's expected to return over 20% in 1997. Heebner also likes Cali Realty Corp., a Cranford (N.J.) company that owns office space in New York, New Jersey, and Pennsylvania. Because these markets have been slower to rebound than big cities such as San Francisco and Boston, Heebner expects a substantial growth in rents once the market turns.

HIT THE MALLS. Martin Cohen of Cohen & Steers Realty Shares mutual fund favors Crescent Real Estate Equities Inc., which owns 11 office complexes, two retail centers, and four single-family residential developments, mostly in Texas. With its aggressive acquisition strategy, Cohen expects Crescent to see earnings growth of 25% next year.

For a value play, consider malls. It's questionable whether they've bottomed out yet, but the rebound in retail sales and acquisitions opportunities makes now a good time to buy. Cohen is bullish on the western regional mall owner Macerich.

With electric utilities in flux and no longer providing the safe yields they once did, REITs make a good alternative. And the industry is still in its infancy, so far capturing only 3% of the $3 trillion real estate market. That means there is certainly room for plenty of growth.

By Toddi Gutner in New York



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