The Dow Jones REIT Index more than doubled in 6 months last year when it rocketed ahead from 85 to 181. After reaching an interim high in September, it has been struggling while most popular averages have been roaring ahead. The REIT index fell 5 10% off its high for 3 months. In the middle of December, REITs were hot, taking the index to 192 after which it pulled back pretty much hugging its former high level of 181. The inability to record new highs while other stocks were (especially high yielders) suggests that REIT investors are holding their breaths, waiting for the other shoe to drop.

REITs have 2 big advantages at this difficult time for financial companies. With their heavy mortgage loads, interest is generally their biggest expense. Low interest rates are bringing significant cost savings when they are needed. Secondly many of their mortgages and debt are held by banks at a time banks are under pressure to make loans and renew existing loans.

Rents are the source of revenues and rent reductions are biting hard. Continuing pressures from the recession are raising vacancy rates which are probably going higher. Rent concessions are used to keep tenants in place. The dreary rental environment may drag on for months, especially if high unemployment rates are not reduced. But REITs have been adjusting to the financial crisis for over 2 years and most should pull through.

I purchased REITs at the beginning of the decade, and these investments generally have had substantial gains. Somebody once said that in 10 years real estate will have 2 good years, 2 bad years and rest are middle kind of years. The better years have come and gone, the bad period is turning out to be longer and harsher than typical. But REITs have hard assets which should at a minimum hold their value over the long term. REIT believers are being challenged. In the long term, higher shares prices will prevail because REITs are good long term investments. However the bigger picture is the laggard performance by REITs may be a negative indicator for the popular market averages.

Simon Property (NYSE:SPG), the 1 shopping mall owner in the US, cut its dividend last year (a very painful decision). In addition they sold shares and increased borrowings to acquire rental properties at attractive prices. So far no announcements have been made, that money remains available for future investment. This metaphor is good guidance for individual investors.