Clearly these economic conditions are not robust and this slow-growth environment is good for equity REIT investors. As Jordan Sadler with KeyBanc explains:
This gradual recovery in demand, slow recovery in demand, is good for real estate because you're soaking up space, and it's not yet robust enough to translate into new supply. Real estate landlords and owners are not yet at a point, because the economy's prospects are so muted, where they're looking to speculate in any significant way and looking to go out and build excess capacity. So the risks of oversupply are very low, by and large, throughout the space.

The Fed's earlier stimulus actions, along with prevailing economic conditions and unfettered access to capital markets among REITs, have also driven down required returns for real estate and, in turn, pushed down cap rates -- which equates to higher property valuations.

KeyBank's Sadler explains that the firm is "an advocate of the 'risk on' trade." He adds that his firm "likes the shopping centers . . . and the industrial REITs all year long." And he "thinks we're in an environment where the economy is gradually recovering, and you don't need to pay a premium for quality, and lower leverage, and things that are just going to be safer."

Some of KeyBanc's recommendations include Taubman Centers ( TCO), upgraded by KeyBanc to "hold" from "underweight" In addition, KeyBanc upgraded Kite Realty Group ( KRG) to "buy" from "hold."

Sadler of KeyBanc said the firm is more positive recently on the industrial sector, where he said supply has been muted in recent years. While development has started to increase in many top-tier markets, the report said, demand remains high. The bank upgraded its rating of First Industrial Realty Trust ( FR) to "buy" from "hold."

Slow but steady job growth and very limited new construction are supporting fundamentals in select office markets, though several markets are constrained by high vacancies and weak demand. KeyBanc upgraded its rating of Boston Properties ( BXP) to "hold" from "underweight." It downgraded American Assets Trust ( AAT) to "hold" from "buy."

The specialty office and industrial sector should continue to benefit from strong fundamentals, led by growing demand for data center space. KeyBanc upgraded its rating of BioMed Realty Trust ( BMR) to "hold" from "underweight."

In health care, positive signs for the sector heading into 2013 include the increasing likelihood that President Obama will be re-elected, which could increase health care spending and reduce reimbursement risk. KeyBanc upgraded its rating of Health Care REIT ( HCN) to "buy" from "hold," based partly on its positive view of the company's acquisition of Sunrise Senior Living ( SRZ). It also upgraded Healthcare Realty Trust ( HR) to "buy" from "hold."

Triple-net REITs, which have a longer-term lease structure, will likely see a greater benefit from the Fed's quantitative easing policies, the KeyBanc report said. KeyBanc upgraded its rating of CapLease ( LSE) to "buy" from "hold."

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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