REITs Rule... Imagine that it is January 1, 1999. In the booming real estate market of 1998, you and your friend enjoyed a great year and have cash to invest. Where do you put your money? Even though you're a real estate professional, you're thinking about NASDAQ stocks,
which rose almost 40% last year.

So you decide to invest in the NASDAQ stocks, which promptly rocket up 85.6% that year (toward a peak of 5,132 on March 10, 2000). Your friend invests in REITs and actually sees his portfolio decline by 6.5%. You're feeling pretty good.

It's now five years later, January 1, 2004. Where do you both stand? Well, your portfolio has actually declined to 90.6% of its original value, a negative compound growth rate of 1.9%. Oops. Meanwhile your friend's portfolio has roughly doubled, reflecting a compound growth rate of 14.7%. Now you're feeling pretty bad.

As real estate markets nationwide have suffered, real estate securities have prospered. Isn't it ironic that in an era of increasing vacancy rates and declining rents, real estate stocks have done extraordinarily well? Is this fair?

Of course, it's fair. It's life. Just listen to a quarterly conference call between REIT executives and securities analysts. I often smile because they bring such different perspectives to the conversation. Kind of reminds me of the book Men Are from Mars, Women Are from Venus.

That's the challenge of trying to understand the drivers of value in the real estate markets (like job creation) and the securities markets (like interest rates). Sure, they're all interrelated somewhere. But exactly where? What do you think?

Spread the Word... Many thanks to Andy Thomas at VirtualPremise for sponsoring this week's Dispatch. VirtualPremise provides software and professional services for enterprise-wide management. If you want to spread the word about your product or service, sponsor the Dispatch. Send e-mail or call 415-485-6700.

--Peter Pike