After much controversy, bad reporting and misleading information, a winner has been declared for 2000.

No, this does not describe the battle for the White House. Instead, it accurately depicts the confusing and – in many cases – disheartening environment for investors big and small, especially as 2000 came to a close. But one thing is for sure: as the year ended, the equity real estate investment trust (REIT) sector could claim victory, not only on its own merit but also in comparison to other indices on Wall Street.

After a couple of years of what could only be described as investor euphoria, the public equity markets came to a grinding halt last year. Some investors relatively new to Wall Street were shocked by their first market downturn, which saw the S&P 500 with a negative total return of more than 9 percent on the year.

Even more disheartening was a loss of nearly 40 percent on the year for the NASDAQ Composite Index, while even the hearty Russell 2000 decreased by 3 percent.

But over this same period, equity REITs experienced an annual total return of more than 26 percent.

At the beginning of 2000, few predicted such a rebound. Many REITs, in fact, were considering or already undertaking stock repurchase programs to boost their lagging share prices. Returns in the industry were negative in both 1998 and 1999, giving little encouragement that REITs would offer reasonable returns, even in a booming real estate market environment.

But in 2000, the dynamics of Wall Street shifted dramatically. Technology-heavy and large-cap indices turned negative, in sharp contrast to their impressive returns of prior years. This pushed investors to re-evaluate their portfolios, resulting in a move toward companies “more appropriately characterized by value, income and predictable cash flow,” said Michael Grupe, vice president for research with the National Association of Real Estate Investment Trusts (NAREIT).

According to NAREIT, the lodging sector posted a total return of 46 percent in 2000, while the office and apartment sectors gained about 35 percent each. The industrial, regional mall, diversified and health care sectors all registered total returns in the range of 25 percent to 30 percent.

So why the shift in the marketplace toward REITs, and will the trend last?

Last year, several factors unsettled the public equity markets. These included a sudden, sharp rise in energy prices, as well as higher interest rates (now somewhat eased by the Federal Reserve). In addition, a steady stream of corporate earnings warnings by large cap companies sent shock waves through Wall Street.

At the same time, marketplace factors made real estate firms look relatively attractive. Investors began moving toward less volatile stocks, including REITs. Price volatility of the NAREIT Equity index is less than half of that of the NASDAQ. Meanwhile, REITs posted average earnings growth of around 10 percent, with a trend toward stabilizing. In addition, year-over-year earnings growth picked up on average in the second and third quarters.

Real estate stocks have offered a haven for those now looking to diversify previously technology-heavy portfolios with investments giving steady dividends and solid returns. And perhaps the lesson of diversification has made inroads with the new breed of self-trading investors in the marketplace, giving REITs an inroad in the year to come.

Whether the trend toward rising REIT prices will continue is anyone’s guess. But one unpublicized item is worth noting. Throughout the last few years, hardly a week would pass without a REIT announcing a stock repurchase program, indicating the company’s frustration with a low stock price.

Yet in the opening weeks of 2001, not a single new repurchase authorization has been announced. Perhaps this bodes well for an industry long awaiting its due.

Published: January 17, 2001

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