MIAMI -- What a difference a year -- and 13% -- makes.

Nowhere is that more obvious than at this year's

National Association of Real Estate Investment Trusts Law and Accounting Conference

at the quasi-tropical Doral Resort and Spa. The mood of the 600-plus attendees is in stark contrast to a year ago, when executives were bemoaning that the markets and investors didn't understand

REITs.

Indeed, the

Ricky Martin

-esque theme of the conference, "Living la Vida REITa" reflects the industry's recent sharp turn for the better as wary investors seek refuge in REITs. "We've seen a broad-based rally," since the beginning of the year, says Richard Schoninger, director of investment banking for

Prudential Securities

. "

REITs are up 13% so far, 25% better than the

Nasdaq

."

That puts REIT management and investors in a more upbeat mood, albeit a cautious one. "It's great to be on this side of the fence," quipped

Mack-Cali Realty

(CLI) - Get Report

CFO Barry Lefkowitz. "I think we can hold these

gains. But, going higher depends on lots of variables."

REIT investors have learned to be relatively circumspect and to avoid seeming too bullish too soon. It was about this time last year that many analysts proclaimed the bottom was near and predicted a REIT rally. However, the dog days of summer sent the sector into a tailspin.

This year, though, the REIT rally may really have legs. "It feels different than last year," says Dan Pine, real estate portfolio manager for

Alliance Capital Management

. At its peak Alliance managed over $900 million in REIT funds; that number shrank to $400 million as REITs fell from grace. "Last year's spring rally raised red flags because institutional investors

left the market. This year, fund flows have increased. It is definitely more constructive than last year."

However, he is quick to note that the recent rally has more to do with general market conditions than with a resurgence of REITs as the darlings of Wall Street. "Seven to eight percent dividends and seven to eight percent growth couldn't compete as

technology stocks ran away, but as fear came back to the market,

REITs look a lot better."

Therein lies the test for REITs. While the attractive yields present a safe haven from market tumult, will the demand stay strong when the market rebounds? And how fast might funds flee REITs when the next wave of techno-mania hits Wall Street? "It's much too early to tell whether the rally can be sustained," opines Art Havener, director of REIT research at

AG Edwards

. "There's been a lot of hot money flow into REITs. In the next six months or so we'll know whether it will stay."

Other managers also shy away from overt optimism. "Is there room for more upside? I hope so," says Lisa Payne, CFO of

Taubman Centers

(TCO) - Get Report

. However, we need to attract more long-term, non-traditional REIT investors and I don't see that happening."

Payne, a former

Goldman Sachs

investment banker, thinks that for the rally to be sustainable, investors must shift their thinking on the total-return equation. "We are an industry that is an income play, not a growth play. When that is in vogue, we'll see more investors.''

Mack-Cali's Lefkowitz is cautious, given the size of the playing field for investors. "We compete for the same dollars as technology stocks, industrial stocks and others. Investors are going to go where they can get the best returns."

Today, that may be REITs. But which sector holds the distinction six months from now is another question.

Building Blocks: Interest and the REIT Life

Rising rates could cool interest in REITs, particularly among investors looking for income. "If an investor can get a 7% yield on a two-year Treasury note and 8% on a REIT, he'll think very hard before investing in the REIT," said Havener.

Higher interest rates may also put pressure on the multiples investors are willing to afford REITs, dampening any further rally if higher prices don't come with a rise in earnings and cash flow estimates. However, that may already be factored into current prices. "Current low multiples and high dividend spreads

to Treasury yields leave REITs well protected," says Pine, noting that rising rates aren't always bad news for REIT stocks. "In 1994, the last time rates moved higher, REITs actually outperformed the broader market."

Coming Off of the Critical List?

Both Pine and Havener list office properties as their top sectors in the months ahead and both like the multi-family sector. However, Pine's Alliance fund began to increase its stake in regional malls because "the fear of the impact of

shoppers fleeing to the Internet was out of touch with reality."

And in one of the more interesting sector calls of late, AG Edwards' Havener declared health care REITs alive -- contrary to popular wisdom. "I think we are close to the bottom in the health care sector," he said. "The vultures are swarming and that can mean only one thing."

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds had no 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 at

invest@cjnetworks.com .