Other problems also hurt REITs. As the economy strengthened, new construction kicked in, thus threatening to dampen rents at existing buildings.
REITs could be in for more trouble if the economy weakens and rents fall. "If the economy really gets into serious trouble, REITs are going to have trouble," said Susan Belden, editor of the No-Load Fund Analyst newsletter. "To invest in REITs, you have to feel confident the economy is not going into recession."
But if the economy remains solid, REITs boast attractive yields that now average about 7.5%.
"They're risky in that people don't like to buy things that have been beaten up so badly," Belden said, "but they have high dividend yields that are pretty secure."
Belden likes American Century Real Estate ( 345-2021; year-to-date return: -22.1%) and Longleaf Partners Realty ( 445-9469; return: -21.2%).
Kim Redding, co-manager of the American Century fund, notes that in 1996 and '97, REIT stocks traded at premiums of 5% to 30% over the value of their underlying assets. Now, the stocks trade at 5% to 45% less than the value of their properties, he said.