Like so many things in the wake of terror, the face of commercial real estate is forever changed by last week's attack on the World Trade Center.

Questions about the future of Manhattan as the world's financial nerve center, concerns over the safety of buildings that touch the sky and even anxiety over the security of large regional malls will have potentially long-lasting effects on commercial real estate and companies that own property. For investors, that means real estate investment trusts, or REITs.

While dividends helped REITs hold up better than the broader markets Monday, the potential impact on real estate -- especially office REITs -- deserves a closer look.

Office: A Scattering Effect?

Any disaster -- hurricanes, tornadoes, even blizzards -- always lead to a re-examination of corporate office space. The location is revisited, the concentration of critical operations is critiqued, and the levels of connectivity are reconsidered. Incremental changes are usually made but rarely have a major impact on office-space fundamentals.

However, events like Tuesday's attacks can create "breakpoint" changes, decisions that create new paradigms. That new paradigm may well include a move to deconcentrate employee locations and will certainly involve re-examining the use of vertical structures to facilitate workspace density.

"The real estate marketplace will change, if for no other reason than the desire to work in a huge tower will decline dramatically," says Matthew Lentz, a real estate analyst at Goldman Sachs and a member of the

TSC

REIT Roundtable.

Also, companies with significant concentration in Manhattan will likely look to scatter those operations around the country to avoid the potential impact of future single-market disruptions.

"The ripples from this 'rock in the puddle' will help suburban NYC and maybe disperse some of Wall Street's labor into other major cities throughout America," says Carl Tash, principal and portfolio manager at Cliffwood Partners, a Los Angeles real estate investment management firm.

While in the short term a number of former World Trade Center tenants will scramble for space in and around Manhattan, the demand for new space in Manhattan is quite likely to slow over time. Many displaced companies are already signing longer-term leases in New Jersey and Connecticut -- partly because there's a lack of needed space in Manhattan.

The reaction Monday was to bid most of the New York office REITs higher. While an immediate scramble for space may push short-term rents higher, the long-term effects may well hurt -- not help -- New York City landlords. Companies like

Vornado

(VNO) - Get Report

,

Reckson

(RA) - Get Report

,

SL Green

(SLG) - Get Report

and

Brookfield Properties

(BPO)

have large stakes tied to the future of Manhattan.

National office companies like

Boston Properties

(BXP) - Get Report

and

Equity Office Properties

(EOP)

have a presence in New York and a strategy to grow in Manhattan, a stance they're likely to rethink.

"The near-term impact on New York City landlords from last week's disaster initially appears positive, but we caution that premium valuations applied to trophy real estate could begin to erode compared to more mundane bread-and-butter assets," CIBC World Markets REIT analyst Tony Paolone told clients Monday.

If companies do re-examine locations and concentration, Manhattan would feel the impact. Companies with locations outside of the Central Business District, or CBD, are possible beneficiaries.

Companies with suburban and low-rise office profiles include

Duke Realty

(DRE) - Get Report

,

Highwoods Properties

(HIW) - Get Report

,

Mack-Cali Realty

(CLI) - Get Report

,

Parkway Properties

(PKY)

and

Cousins Properties

(CUZ) - Get Report

. Even companies like

Arden Realty

(ARI) - Get Report

with a California focus could benefit from the shift.

This shift won't happen overnight or even in the next quarter, but investors should keep a keen eye on the Manhattan office market and other CBD fundamentals to gauge the impact.

"The valuation disparity between high-profile CBD assets and suburban assets could narrow," noted Paolone.

Economic Uncertainty Grows

While short-term dislocation may help some Manhattan office REITs, the impact of last week's tragedy on the economy may mitigate most of the benefit. A protracted slowdown could put pressure on all REITs, not just those with office portfolios.

"The reality is that this economy was already running on fumes of an exhausted consumer," Tash says. "The Michigan sentiment number last week was a disaster before those planes were turned into missiles. Do you think two- to three-hour waits at airports and continued terrorist threats will make people want to go out and spend?"

Malls were deserted over the weekend, open houses were canceled, and consumers are still glued to their televisions waiting for the next shoe to drop.

That leads Tash to a very cautious conclusion. "Bottom line: Housing, lodging -- particularly the upscale hotels -- and mediocre retail are history," he says. "Last week's events just make all of these problems come to a conclusion more quickly. I don't see how last week's events do much for demand for property."

Is there a silver lining? Only that REITs and their dividends may provide some insulation from a very uncertain market.

Noted Paolone, "While overall demand for space will likely deteriorate with the economy, REITs should fare relatively better than other sectors due to high profit margins, lower historical volatility, high dividend yields, the Old Economy nature and their 'value' stock bent."

The question is, will that be enough? In times like these, we look for solace wherever we can find it.

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.