Royal Shepard, a REIT analyst with Standard & Poor’s, is cautious in his outlook for apartment REITs for the second half of 2007. “In 2006, apartment REITs experienced the perfect storm,” he says. “Supply and demand was out of balance, so we were seeing high occupancy rates leading to higher rents, which created an 8 percent growth in FFO. The sector benefitted in the first half of 2007 from the rental increases of 2006, but in the second half of the year, the slowing economy is bringing supply and demand more into balance.” He forecasts FFO growth of 4 percent to 5 percent overall for apartment REITs.

Shepard is more positive about office REITs for the second half of the year. Following a year of flat earnings in 2006 driven by private equity merger and acquisition activity, “Office REITs could see 7 percent FFO growth this year, versus 2 percent in 2006,” he says.

Industrial REITs also are enjoying strong and rising fundamentals, particularly those REITs with an international platform, according to Gordon Keiser Jr., senior vice president and treasurer, ProLogis (NYSE: PLD). Industrial REITs with international portfolios are positioned to take advantage of growth that is not tied to the U.S. economy, making them more insular to changes in domestic supply and demand, interest rates or the housing market.