WASHINGTON -- All is well in REITville. Well, sort of, and at least for now.

That's the somewhat convincing message from the annual confab of the National Association of Real Estate Investment Trusts, or NAREIT, which is celebrating the 40th anniversary of the creation of REITs, the last piece of legislation signed by President Eisenhower.

There is plenty to celebrate. REITs, as measured by the SNL Securities Equity REIT Index, have returned 18.72% since January, compared witho a loss of 1.44% in the S&P 500. And, for the first time in more than three years, REITs are outperforming the broader market over a 52-week period, up 17.76% compared with 11.32% for the S&P 500. That comes on the heels of two years of dismal returns for REITs, which sent many investors scurrying from the sector.

Still, there is a concern that the rally has been bolstered by momentum investors looking for a place to park cash until the inevitable tech rally resumes. "Real estate is a long-term asset, but we've only been good at attracting short-term investors," says Steve Buller, real estate portfolio manager at Fidelity Investments. Indeed, Mark Decker Jr. of Ferris Baker Watts points out there is now a "clear, inverse relationship" between price performance of REITs and the Nasdaq Composite.

The real challenge for REITs will come if -- or maybe more appropriately, when -- the New Economy companies regain footing and head higher again. Between now and then, REIT managements must work hard to attract new, long-term investors and to bring back investors who defected.

At least one analyst, Jonathan Litt, director of REIT research at Salomon Smith Barney, believes the industry's returns will be more competitive in the coming years. "The broader market [appears] to be moving back to more average returns," he says. "That will be good for REITs."

Technology and Real Estate: The Real Deal or Just Cowpies?

Many REITs in the past year have spent a bulk of their face time with analysts and investors, stressing the positive impact technology initiatives will have on their bottom lines. From retail REITs hyping new ways of attracting customers to malls, to wiring offices for broadband pipe and business-to-business initiatives, a plethora of REITs have tried to masquerade as quasi-New Economy companies.

Among the most aggressive on the technology front has been Sam Zell's Equity Office Properties (EOP:NYSE - news - boards). Yet, even Zell wonders if the potential impact of New Economy initiatives by REITs has been overdone. "Is this technology just a bunch of bull...?" he asked a panel of six REIT analysts and fund managers Monday at the opening session of the conference.

The most direct response came from Salomon Smith Barney's Litt, who recalled that the technology hype really proliferated in the second half of last year, when REIT stocks were near historic lows and New Economy stocks were wooing investors from the Titanic-like sector. "Technology was like a lifeboat for an industry that was sinking fast," he says.

Still, analysts agree REITs' technology initiatives should focus on supporting the core business of managing real property. "If [technology] isn't exploiting the current asset base, then why are they doing it," asks Fidelity's Buller.

Mike Kirby, a principal with Green Street Advisors, a Newport Beach, Calif., real estate research firm, argues REIT managements aren't well prepared to deal with technology that isn't in direct support of their primary businesses. "I don't know too many REIT CEOs like Jack Welch," he says. "And I don't know many REIT CEOs that I want leading my technology initiatives."

Yet, it is important to recognize that technology is becoming an integral part of operating real estate, and REITs must be competent in the New Economy. The challenge is to focus on technology that helps the fundamental business and does not distract from it. Or, as the succinct (and usually insightful) Zell puts it, "The real opportunity is to use technology to further our own efficiencies."

Consolidating Egos?

One quiet murmur always heard in the hallways of conferences like this is talk of the next deal. And with mergers and purchases over the past week fresh in everyone's mind, the whispers have escalated to the public stage.

Most analysts say the deal machine is just warming up and will be spurred by a growing separation among companies. "There will be greater disparity between the 'haves' and the 'have-nots,'" says Greg Whyte of Morgan Stanley Dean Witter. "You will see a lot of consolidation. And the ego factor at some point will be sufficiently suppressed."

Salomon Smith Barney's Litt agrees, offering a new metric to measure company disparities. "You will see a separation of companies by property category, by the level of service they provide to tenants."

Litt suggests REITs at the top of the service list will be the survivors. And he argues that those REITs will be much larger than today's companies. "There will be a number of giant companies," he says. "You already have a couple of $20 billion REITs. That number will explode in the next five years."

Which area is most ripe for consolidation? According to most analysts, retail. John Kriz of Moody's Investor Services says last week's deals are only a precursor. "Consolidation in the regional malls is just beginning," he says. "We aren't even close to the peak in retail mergers."

A Post Through the Heart

While most of the news from Washington is good, one company did cast a pall over the REIT jubilee. Post Properties (PPS:NYSE - news - boards), the Atlanta-based developer of upscale apartments and innovative mixed-use developments, says its 2000 earnings will be disappointing. The company expects its annual funds from operations to be between $3.70 and $3.76 per share, compared to analysts' consensus of $4.01.

Disappointment Ahead? After a great summer, Post Properties may be slipping.

Post says its exposure to floating rate debt, in tandem with rising interest rates, will hurt earnings. In addition, the company says leasing of development projects is taking longer than estimated. Post says it will sell assets in Charlotte, N.C., Phoenix and Dallas as it "concentrates attention on fewer markets going forward."

While Post says the problems should be industrywide, a number of analysts suggest this is not endemic to the apartment sector. "This is a Post problem, not a multifamily problem," says one analyst. "This is a result of aggressive development and a misplaced bet on the direction of interest rates."

As suggested in a previous column , Post's exposure to rising rates was exacerbated by its high level of floating rate debt, a problem that, while not widespread among REITs, concerns many investors. "Let's hope there's not more speculation along the Post lines," says Patrice Derrington, portfolio manager of the Victory Real Estate Investment fund.

That would dampen the celebration.

Coming next: the picks (and pans) of the TSC REIT Roundtable at the conference, and panelists' thoughts on the industry as we head into the homestretch of the year.

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Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds .

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