Are there still strongholds in this group ? apartments perhaps, or maybe office?

We still like apartments although we are starting to see pricing power diminish. Two negatives are hurting the apartment sector: job growth, which drives apartment demand has stalled across the country, and condos and houses that could not be sold are being put into the rental market which continues to add competition. On the positive side, difficulty obtaining financing and flat new home sales has created a larger pool of renters. It is still unclear if these positive will outweigh the negatives in the coming quarters.

Which sector is your favorite going into the end of 2008?

In a rapidly declining economy and uncertain credit environment, we now favor diversified REITs. That is, companies who specialize in more than one property type. There a few larger diversified REITs, such as Vornado (VNO), that have significant retail and office holdings. These companies should fare better as they can better withstand a decline in one sector.

There were many REIT buyouts in 2005 and 2006. Do you see this coming back anytime soon?

No, many of the REIT buyouts were funded with high leverage and cheap debt, which was the only way to make these high-priced deals work. As this is not possible anymore, we think large company sales will be non-existent well into 2009. Banks are not willing to lend on mega deals unless a buyer puts in a large amount of equity.

Now, please give us some your best specific Buy recommendations.

We have a Buy recommendation on Vornado, a large office/retail REIT with a lot of holdings in NYC, still one of the nation?s best office markets where landlords can consistently raise rents. In the apartment sector, we like Mid-America Apartments (MAA). The company had a good 2nd quarter, the yield is high, over 5%, and due to a recent sell-off the current valuation is attractive.

What stocks or sectors are you recommending that investors sell?

We would still be careful of suburban office owners, as fundamentals are continuing to deteriorate in this sector. With job losses, corporations are not expanding and office vacancies are increasing in most markets.

We still have a Sell on Liberty Properties (LRY). While the company reported relatively good 2Q results, we think the company has exposure to markets that will continue to weaken. In addition, LRY has near-term development lease up risk.

In the apartment sector, we have a Sell on Post Properties (PPS). The company had put itself up for sale but could not find a buyer. Operations at Post have been deteriorating and the company recently took large impairments on its development pipeline. Post is currently marketing a large portfolio for sale, and we expect there will be difficulty finding a buyer at attractive pricing due to problems financing new apartment deals.

Greg Sukenik is a senior analyst covering the REIT industry for Zacks Equity Research.