By Jada A. Graves

Also, as we observed the last time real estate valuations peaked, which was in the latter part of the 1990s, "REITizing" corporate-owned real estate will be a topic of considerable speculation. It was at this point in the last cycle that there was speculation regarding McDonald's real estate portfolio, and it certainly is a topic of conversation again this time around. Unlike the last time, however, we think that, given a lower expected return environment, "REITizing" corporate real estate assets may have more success than the last go around.

2. What advice would you give to an investor buying into REITs for the first time?
One of the greatest benefits associated with the maturation and increased acceptance of REITs as an investment is the significantly increased variety of investment vehicles available to investors to gain exposure to REITs. However, we believe that the REIT market remains inefficient enough so that investors that are willing and able to do their homework can exceed the indices, unlike the efficiency in the broader market, where very few professional investors are able to exceed the broad market benchmarks. We would suggest that investors invest in a pool of the best management teams in the best markets and build the portfolio for the long haul. We would avoid companies that invest in commodity-like product with limited barriers to entry, as these portfolios typically require strong demand growth to succeed and have limited up-side due to competition from new supply.

3. What professional in the REIT industry do you admire the most and why?
The management team I most admire is at Corporate Office Properties Trust (NYSE: OFC). Rand Griffin and his team have built a business on the basic strategic principles of being the dominant office property owner in submarkets with natural demand drivers while delivering top-quality service to their customers. Strategically we believe that they are a step ahead of the marketplace and the competition. Compared to most other office companies, which are looking to fill vacancy, Corporate Office has been building a land position due to the strength of its markets to accommodate future growth for its key tenants.

4. Over the next 12 months, which real estate sector will perform the best, and why? Additionally, which sector will face the biggest challenge, and why?
Over the next 12 months we continue to see the full-service lodging sector as having the best fundamentals in place for continued strong operating performance. A combination of relatively low new supply due to the longer lead times required to develop new properties, along with inventory shrinkage due to condominium conversion and natural disasters will generate overall modest increases in room inventory. Overall demand should increase primarily as a result of increased corporate and group travel business. We expect group travel and corporate rates will be the primary catalyst for increased revenue per available room (RevPAR), which could grow by nearly 10 percent in 2006.

Behind the standard condominium concerns in selected markets, we continue to expect that the non-coastal office markets will likely see the toughest operating environment in 2006 as property level net operating income (NOI) will continue to stagnate. We expect NOI to be buoyed by improving occupancies but negatively impacted by rental rate roll-downs on expiring leases. Given that office leases typically average about seven years, that would put expiring leases at or near the previous office rent market cycle peak, which occurred between 1999 and 2000. In addition, with plenty of capital availability and cap rates at recent cycle lows, new development is an additional risk to the occupancy recovery currently under way.