The commercial real-estate sector is expected to grow even stronger in 2005.
In 2004, the stocks of REITs, companies owning real estate or mortgages that must pay out at least 90 percent of their taxable income in the form of dividends, delivered total returns (stock-price appreciation plus dividends) of 32.1 percent in 2004, up from nearly 37 percent in 2003.
The full-year performance is surprising because REITs' total return was down 5.7 percent in the second quarter, in part on fears that rising interest rates would make their stocks less attractive than other investments and on fears their shares were overpriced.
A record net $7.55 billion flowed into real-estate mutual funds in 2004, according to fund tracker AMG Data Services, of Arcata, Calif. That was up from the then-record $4.5 billion of 2003. Real-estate mutual funds were the top performers among "specialty" mutual-fund categories, delivering an average total return of 31.4 percent, according to Morningstar Inc.
Darren Rabenou, client portfolio manager at JPMorgan Fleming Asset Management, the asset-management arm of J.P. Morgan Chase & Co., cites a number of factors for REITs' continued success in 2004, including improved real-estate fundamentals, a tepid overall stock-market recovery, and, especially, REITs' dividend yields. Though those yields are down from about 5.6 percent in 2003, they still are more attractive than other investments. The average dividend yield for REITs was 4.7 percent, compared with 1.7 percent for companies in the Standard & Poor's 500-stock index, according to Morgan Stanley.
Some analysts and financial planners have expressed concerns, however, that REIT stocks are overpriced and that investors shouldn't count on such big gains going forward.
Investors weren't only snatching up REIT stocks, but properties as well. Transaction volume for apartment complexes, warehouses, office buildings, malls and shopping centers with purchase prices of more than $5 million rose to $159.7 billion in 2004, from $120 billion in the year-earlier period, according to Real Capital Analytics Inc., a New York real-estate research firm.
It wasn't just big investors gobbling up properties. The number of apartment, retail, office and industrial properties that changed hands in the $500,000-to-$10 million range is projected to have risen 23.3 percent in 2004, to 31,688 deals from 25,684 a year earlier, compared with the more than 13 percent increase in 2003, according to the research division of Marcus & Millichap Real Estate Investment Brokerage Co., Encino, Calif.
Signs of improved fundamentals also fueled interest in the sector. The average vacancy rate for the nation's 64 biggest office markets was expected to fall to 16.5 percent at the end of 2004 from 16.9 percent at the end of 2003, the first annual decline since 2000, according to Reis Inc., a New York real-estate research firm. Conditions in the apartment, industrial and retail markets also improved, according to Reis.
