<<The Texas markets are showing strain in the unpublished areas of generally increasing acquisition cap rates, rent reductions and concessions for ofc. and apts....>>

One of the "hot topics of the day" in REIT world (if anything in our world can be considered "hot") is the question of whether the public markets for real estate securities are leading the private markets...or, to put it another way, is the decline in REIT stock pricing anticipating more difficult conditions (i.e., higher vacancy rates, more concessions, slowing market rents and rising cap rates) in most "private" real estate markets. My most recent "REITWeek" addresses this issue, but so have others.

The short answer is, no one knows. Certainly there is little evidence of this, as there seems to be ample capital available to buy reasonably well-located real estate, driven by funds coming from institutional investors such as pension funds; and, based on what we heard today from various REIT executives at the NAREIT conference call, cap rates are holding steady. These investors, many of whom should be regarded as "sophisticated," apparently do not think that real estate returns are about to head south in a big way. Whether this is "dumb money" is a valid question, but I think it's too soon to know that. We may get a better handle on this after the REITs have reported their results for Q3, where same-store NOI growth and occupancy rates will be watched very closely.

A related question, which is even more difficult to quantify, is whether today's REIT prices ALREADY discount a modest increase in cap rates and slower NOI growth. Existing FFO multiples haven't been this low since 1986 (per a DLJ study), and the last time we saw REIT dividend yields of over 8% was back in April '95, four and a half years ago. Furthermore, today's dividends are much better covered with AFFO than any tme in my memory (and I've been following this industry since 1975).

These facts would tend to argue that the market for REIT stocks, at present levels, has already (and perhaps sufficiently) taken a weakening of real estate fundamentals into account. Much may depend upon the extent of such weakening, assuming that it will even occur. We are all just guessing, and anyone who claims to have The Answer is just blowin' smoke.

Ralph