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Will REITs Continue to Rise?


A rebound could be only a matter of time.

Even as REITs -- especially those in the commercial and office-space market -- are expected to be the next big shoe to drop in terms of default rates as well as a topic of conversation as the Fed meets, the sector has enjoyed a steady rise. The iShares Dow Jones Real Estate (IYR) has climbed some 30% in the past 3 weeks. The belief is that Chairman Bernanke will spell out some specific backstops for preventing a domino of defaults.

The optimistic sentiment surrounding this group is epitomized by the reaction to Maguire Properties (MGP) earnings report yesterday. Even as the company posted a wider-than-expected loss of $357 million, or a whopping $7.85 a share, it announced it will default on 7 of its largest California office buildings and it's struggling to refinance its $4.6 billion in debt the shares popped 20% on the day.

Why? Because the company promised it had no intention of filing for bankruptcy and hinted it may receive a capital infusion from an unnamed third party. Right. And I have the deed to the Brooklyn Bridge.

Another big winner yesterday was SL Green (SLG), which after gaining 50% in the past month, added another 7% to $35 a share. Sparking the advance was news that SL Green has sold a 49% stake in a mid-town Manhattan office building for $250 million, or about $500 a square foot. While that price is about 25% off the 2006 peak valuation, it was still about double for what it paid when it bought the building back in 2004.

Location Matters

A few important things to note before assuming that this represents a rekindling of the demand for both office space and the accompanying REITs that own the buildings: The building being sold, 485 Lexington, has a good location of just a few blocks from Grand Central Terminal. Despite some recent renovations, it remains a fairly unremarkable building.

But that's been SL Green's strength -- focus on B-class buildings that have good locations and large floor plans that can be divided or combined to accommodate both Fortune 500 companies (Citigroup (C) is a major tenant) and small businesses alike. But the price assumes expectations for 97% occupancy and stable rent rates -- neither of which is assured.
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No positions in stocks mentioned.

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