By Kyle Fishburn

1. What developments do you expect will play a major role in the REIT industry next year?

There will be fundamental changes to the mortgage side of real estate with respect to the origination and regulation of subprime and Alt-A residential mortgages. The Federal Re-serve has become more accommodating by cutting the discount rate, but the necessary corrective stabilization of the subprime market is at least a year away.

In 2008 we will see a record number of resets to subprime and Alt-A residential mortgages. The national credit situation will get worse before we see concrete, stabilizing improvements.

In the meantime, REITs will continue to have strong fundamentals in commercial credit. Investors will look favorably at commercial property markets and mortgage REITs with assets secured by well-perform-ing properties and not exposed to current subprime credit issues.

2. Several privatizations have taken place in 2007. Will this trend continue into 2008?

The privatization trend will slow in the coming year. The players largely responsible for the buyout frenzy were the private equity giants. They had the ability to conduct the privatization takeovers by drumming up highly leveraged deals that were attractive to the owners of public portfolios. These types of dealings will become less available as regulation of private equity increases and cap rates rise to lower net asset values.

The opportunity to make these accretive deals will still be there, but we will see the buyer change. The private equity firms will be replaced by REITs themselves, as the leveraging playing field levels.

3. Which real estate sectors will perform the best over the next 12 months, and why? Which sectors do you think will face the biggest challenges?

The mortgage business will continue to see challenges as the credit situation flounders into next year. However, industrial property REITs, particularly global growers such as ProLogis (NYSE: PLD) and AMB Property Corporation (NYSE: AMB) will see strong results.

The bottom line is that stocks tend to outperform other holdings in a slowing economy. Industry and healthcare holdings screen well in evaluations, namely dividend distribution models, NAV and price-to-FFO multiples.

Property REITs owning data centers are a specific example of high performance because of their favorable leasing spreads. From 2000 to 2003, technology REITs, such as Digital Realty Trust (NYSE: DLR), were leasing property at inexpensive rates, but demand for such properties and locations has increased dramatically. That resulted in the price per square foot numbers spiking from approximately $27 to anywhere from $60 to $90. These REITs will see strong performance during the next five years.

Editors Note: Turn to REIT Snapshot to read more on Digital Realty Trust.

4. The attractive investment proposition REITs present has drawn a broader array of investors to the industry. What recommendations would you give to a first-time REIT investor?

The current U.S. economic environment is a stock-pickers' market. Select REITs that exhibit strong fundamentals in credit evaluations and internal growth, have a good development outlook and solid management.

Additionally, companies that employ strong balance sheets will perform well. Examples of some of these exemplary firms are Essex Property Trust, Inc. (NYSE: ESS), Simon Property Group, Inc. (NYSE: SPG) and Vornado Realty Trust (NYSE: VNO).