Commercial Real Estate Earnings Outlook

While investors have fretted about the implosion of the housing market, the commercial real estate market has continued to reach new heights. The Dow Jones Wilshire REIT Index, a composite of commercial and residential real estate equities, soared 34.4% in 2006, and has gained 2.9% in the first quarter. Several factors have contributed to commercial real estate's vigor, which bodes well for upcoming earnings reports.

Last year marked the biggest year for merger activity in this real estate sub-sector, with private equity playing its hand in such deals as this February's acquisition of Equity Office Properties Trust by Blackstone. It's unlikely that much will stop the flow of money from the private equity spigot, and modest interest rates are helping to keep real estate a glamorous target.

New investors are also becoming lured into real estate investing as they become more familiar with the REIT structure. An increasing number of 401(k) pension funds have added REIT investment options, while many pension funds have increased their real estate allocation. Global markets have also witnessed the introduction of more REIT products, and curious foreign investors are apt to sightsee among the U.S. offerings.

Still, valuations are high, and it might be overly ambitious to expect double-digit returns. Demand for office space in the first quarter generally slowed, and like other segments of the real estate market, it's all about location, location, location. Savvy investors need to look for those companies where demand for office space remains high and rent even higher. That means markets such as New York, California, and the metro D.C. area, which bear witness to tight supply and rental increases. Companies such as Boston Properties (NYSE: BXP  ) , Corporate Office Properties (NYSE: OFC  ) , Mack-Cali (NYSE: CLI  ) , Maguire Properties (NYSE: MPG  ) , and SL Green (NYSE: SLG  ) have concentrated holdings in those areas, and should report strength as they announce earnings over the next two weeks.

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Fool contributor S.J. Caplan does not own shares of the companies discussed in this article, but she does own shares of iShares Cohen & Steers Realty Majors. The Fool has a disclosure policy.


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