All Smiles at REIT Confab

SAN FRANCISCO -- This year, the pockets of the attendees of the annual National Association of Real Estate Investment Trusts convention looked a little fatter, and it was hard to find a face without a smile.

That should really be no surprise, given that the REIT stocks are up 27% this year, based on the U.S. MSCI REIT index, and are set to beat the broader indices for the seventh straight year.

With the huge amount of capital flowing into the space from private equity and pension funds, it was hard for most industry participants at the conference to imagine any sort of meaningful correction in the space, despite recent earnings disappointments from the likes of General Growth Properties(GGP Quote), Mack Cali(CLI Quote), Post Properties (PPS Quote) and Equity Residential(EQR Quote).

"Who knows, maybe this big love fest will end ugly?" says one buyside investor. But it's not likely, he says. After all, REITs are nowhere near as volatile as tech stocks and "getting wiped out," as he says, is not a real possibility. (This is largely because these companies own commercial real estate buildings that are worth a lot of money on the private market.)

Expecting 25% annual returns in the sector is foolish. But investors can reasonably expect 10% annual returns going forward in the sector, says David Lee, a portfolio manager with T. Rowe Price. This forecast assumes 7% earnings growth and a 3% dividend yield -- and also assumes that multiples hold in the sector.