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Debt Markets Rattling REIT Stocks

"I'm not buying the sector here," says one real estate hedge fund manager who already has REIT exposure. "There won't be any M&A in the sector in a meaningful way. Not in the near-term."

So unless you really love the dividend, buying the sector could be problematic because yields could continue spiking as stocks prices drop, and earnings growth may slow next year with the economy weakening.

At some level, investors continue to be worried about catching falling knives in the sector. To be clear, REITs are in far better shape than homebuilder stocks. But valuation concerns linger.

On the private side of the real estate market, cheap debt helped cause valuations to reach unrealistic levels -- the phenomenon of too much money cashing too few deals. Now, debt availability is severely limited. It's become clear that Sam Zell's sale of Equity Office Properties to Blackstone (BX - Get Report) earlier this year marked the top of the market.

"Debt is out there, but it's a lot tougher," says Stephen Coyle, chief investment strategist with Citigroup Property Investors. "If someone is looking for debt with a deal of $100 million or less, it's out there. People are not getting debt on big giant deals. You can't do an EOP (Equity Office Properties) deal today."

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