Pire is forecasting that private equity will slow the pace of its buying spree this year. "Part of the arbitrage profit no longer exists. The risk premium has compressed," he says. He believes that private equity has already factored in lowered performance expectations for the year, though. "I think 2007 will be an okay year, not a shoot-the-lights-out year," he adds.

Rick Imperiale, portfolio manager of the San Francisco-based Forward Progressive Real Estate Fund, which is comprised of US-based REITs, says he will be happy if valuations hold steady and REITs deliver earnings growth of 7% to 8%. "That, plus 3% to 4% in dividends will mean a 10% to 12% total return profile for publicly traded real estate." He agrees with Nareit's position that operating fundamentals are likely to remain strong in 2007, assuming there is no unexpected economic shock or sharp slowdown. "Demand continues to move forward as the economy improves. Meanwhile, new supply remains relatively subdued, so vacancies in most markets are going down," he says.

Valuations are a worry, Imperiale admits, but not as much as some managers say. "Public real estate valuations look slightly rich when using normal metrics," he says. "However, we don't think they are unreasonably expensive based on a forward-looking operating outlook." Also, he adds--and this is key to Imperiale's sanguine attitude towards valuations--REITs might look expensive now, but that is because they are factoring in not only improving real estate fundamentals, but also higher replacement costs. "This is not something I hear people talking about. I would estimate that construction costs and other inputs have risen 30% over the last few years," he adds.

Two REITs Imperiale likes are SL Green Realty Corp. in New York City and AMB Property Corp. in San Francisco. "SL Green is an excellent operator focused on B quality buildings in Manhattan where the rank and file work, not the high profile, class A trophy buildings. AMB Property is an industrial REIT that is specializing in high-throughput warehouses for the movement of freight, a narrow segment of the industrial market," he explains.

Russell Appel, founder and president of the Praedium Group in New York City, is also a believer in the REIT asset class. "I think REIT returns will continue to rise in 2007 for several reasons," he says. "One, underlying income and Funds From Operations will continue to increase due to market demand. Two, pension and defined contribution plans are increasing allocations in REITs. Also, international investors will continue to be attracted to them for various reasons including tax advantages. And finally, privatizations will continue to pull shares out of the system, which will then be reinvested in real estate." This is more of a structural than economic issue he says, but still pertinent to understanding valuations: the capital in the sector essentially stays the same while the number of shares decline, thus pushing prices higher. Appel notes that many investors do believe REITs are overvalued. "But I am still a believer that, relative to private equity market values, they are fine."

Leo Ullman, CEO of Cedar Shopping Centers Inc., a self-managed REIT focused on supermarket-anchored shopping centers and drug store-anchored convenience centers in Port Washington, NY, says focusing on just private equity and its effect on REITs is only half the story. "One factor that will continue to favor our industry is the fact that interest rates continue to hover in the mid-5% area. That has benefited us tremendously," he says. Cedar Shopping Centers raised approximately $130 million in mid-December through an equity offering.

As a result, Ullman says, "we have driven down total debt to our total capitalization ratio." The firm is planning several joint venture transactions this year, he adds. "But we still felt it was very important to raise additional equity."

Most REITs, in fact, can be expected to continue to refine strategies put into play last year. Howard Sipzner, Radnor, PA-based Brandywine Realty Trust's new CFO says the company will continue to sell off non-strategic assets and strengthen its presence in core markets. "The key for us is to identify and sustain occupancy gains and rental rates in our key markets. We have ambitious plans to do so in 2007."

Chris Volk, CEO of Spirit Finance, a Scottsdale, AZ-based REIT that focuses on sale-leaseback transactions for single-tenant operators, says it still can find good opportunities to invest in assets that deliver solid rates of return. "Our dividend yield is a little over 7% right now," he says.