We keep hearing about the implosion of the residential housing market. Should we expect the same problems to develop in the REIT sector?

The answer is no. The problems in residential have somewhat spilled into the commercial property sector. Cheap and easy financing is a thing of the past, and this will continue to bring down commercial property values.

Values are coming down mostly in older, class B and C properties in smaller markets, but now we are seeing cap rates increases in A properties. The difference is that commercial properties produce cash, and thus far, cash flows in most sectors have held up reasonably well. Commercial delinquencies are still low.

REITs are generally well capitalized and have low debt levels compared to private owners, so we do not expect any large property REITs to get into liquidity problems in the current economic downturn. More highly leveraged private developers could run into problems servicing debt if commercial rents continue to drop.

How do you expect 1st quarter earnings to look?

2007 earnings growth was above 6% on companies that we cover. We are projecting about 3-5% overall FFO [funds from operations] growth for the full year 2008, so this is the range that we are looking for in the 1st quarter. This is unspectacular but steady, and good considering the current economic problems in the US.

Our projections could be overly opportunistic and we think some companies will have difficulty growing earnings in 2008. There could be some negative surprises - more toward the end of the year - as the dismal economic situation starts to show up in results.

Well then, which sectors would you be in 2008 and which would you avoid?

As a group, I still like apartment and health care REITs, two sectors that have outperformed in 2008 over office or retail. The housing market has not bottomed out and apartment owners should benefit as people cannot finance or are putting off home buying.
People will continue to spend on healthcare even as the economy weakens, and healthcare spending will remain stable this year.

I would generally stay away from most office REITs. National office vacancies are increasing in most markets, a bad sign job for office landlords who will have to lower rents to keep and attract tenants. In light of current economic conditions, many corporations are not willing to take more space. Retail is having problems as consumer spending and confidence continues to plummet, so be cautious of this sector.