Ever since the economic bust first really started to gather steam, it seems like pundits have been saying that commercial real estate would be "the next shoe to drop."

In most parts of the U.S., it's pretty easy to see that commercial real estate is having a tough time. Empty storefronts and unleased office space -- even entire "see-through office buildings," as an acquaintance of mine calls them -- seem to be everywhere. Even areas that otherwise seem to be doing pretty well economically have their share of unoccupied commercial space.

But for all of the talk, and despite all of the seemingly-plentiful evidence, the "shoe" hasn't -- quite -- dropped. In fact, real estate investment trusts (REITs) have outperformed just about everything over the last year. What's going on?

The bust that wasn't … or was it?
Of course, "REIT" isn't exactly synonymous with commercial real estate. REITs as a category include a variety of companies -- to take just one example, look at dividend monster Annaly Capital Management (NYSE: NLY). Annaly is structured as a REIT, but it's functionally an investing firm that buys mortgage-related derivative securities rather than properties themselves, and so its fortunes are not necessarily tied directly to the commercial real estate market.

But even among true commercial REITs, plenty of commercial real estate holdings have outperformed. That seems strange, or at least counterintuitive. But to some extent, the explanation seems likely to be fairly simple: They were priced for disaster, disaster didn't quite come, and prices recovered.

To see if it really was that simple, I looked at the price histories of three holders of commercial properties. I've shown prices (adjusted for dividends and splits to keep things consistent) from October 2007, March of last year, and Monday of this week.


Price on 10/1/07

Price on 3/2/09

Price on 8/9/10

Simon Property Group (NYSE: SPG)




Federal Realty Investment Trust (NYSE: FRT)




Digital Realty Trust (NYSE: DLR)




Source: Yahoo! Finance. Prices have been adjusted for dividends and splits.

In all three cases, we see a seriously nice bounce: In fact, for Digital Realty -- which buys, develops, and manages data centers and properties used by tech firms -- we see considerably more than a bounce. Simon Property and Federal Realty focus on retail space, which seems like it should be doing particularly badly, but they've both done quite well since last year's market lows.

So why hasn't this market completely fallen apart? And more to the point, will that shoe finally drop?

Extend and pretend
My fellow Fools have gone back and forth on whether commercial real estate is doomed to fail or starting to recover. But as to why the market hasn't yet completely collapsed, I think Fool Robert Brokamp is on to something. In the new issue of the Fool's Rule Your Retirement newsletter, Robert points out that while there are a lot of investment funds waiting to pounce on distressed real estate bargains, there are relatively few bargains out there.

Why? While we've seen lots of residential real estate foreclosures, there haven't been many in the commercial space. As Robert notes, this is because banks have been modifying the terms of commercial real estate loans rather than pushing owners into foreclosure, hoping to keep owners afloat until the economy recovers. Meanwhile, those funds need to put their money to work, which means competition for the deals that do come to market. That in turn means higher transaction prices.

So is there an opportunity for investors here? Fool Jeremy Myers thinks we may have seen the market's bottom, and he suggests looking at commercial real estate service providers like Jones Lange Lasalle (NYSE: JLL), which will make money as the market starts to recover. But for those of us who aren't real estate specialists, a REIT-holding mutual fund might be a better way to get exposure to this corner of the market.

Robert's Rule Your Retirement article suggests several good REIT mutual funds for those looking for longer-term holdings that won't keep them up at night. Rule Your Retirement is a paid service, but you can check out Robert's take on this market and his ideas for investing in it for free with a complimentary 30-day trial. Just click here to get started.

Looking for other retirement investing ideas? Jordan DiPietro has five stocks that could help you retire rich.

Fool contributor John Rosevear has no position in the companies mentioned. Jones Lang Lasalle is a Motley Fool Hidden Gems recommendation. You can try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.