By Bernard Winograd

While growing investor interest in real estate is fueling a proliferation of REITs and REIT-like vehicles around the world, the REIT landscape in the United States is being redrawn. Since the start of 2004, more than 50 public equity REITs and REOCs have disappeared from the U.S. market via mergers and acquisitions, while 25 equity REITs have gone public. Although some have decried what they call a "privatization wave" as driven by misguided allocations of investment capital, these changes are better characterized as part of the next phase in the REIT market's continuing evolution.

From a historical perspective, the "modern REIT era" was largely a product of the severe liquidity crisis in the early 1990s that crippled the real estate industry and left many owners with a desperate need for capital. Nearly 100 REITs went public from 1992 through 1994. Unlike the relatively passive REITs from the first decades of the REIT market, these new REITs were fully integrated operating companies that were able to tap public capital sources in an era when private capital was very scarce. Today, private debt and equity capital is not only readily available, it's incredibly cheap by historical standards.

For most REITs, this abundance of relatively cheap private capital has made competing for assets extremely challenging. For some management teams, it has provided an opportunity to exit the public markets. However, for REITs that remain in the public sphere, it also has created new opportunities to add value and grow earnings. Some of these initiatives, such as joint ventures and merchant building, are not new to public REITs.

However, some other new ideas represent a fairly radical shift from the 1990s REIT paradigm. For example, a handful of REITs have expanded to non-U.S. markets, a decision that poses numerous challenges. Besides the obvious currency, execution and political risks, there are the challenges of competing for capital with international REITs that either reside or invest in the same markets. For investors, investing in multinational REITs requires evaluating these issues and deciding how the foreign assets of a U.S. REIT (or the U.S. assets of a foreign REIT) should be valued. The potential rewards may very well justify the risks, particularly for companies whose decision to invest abroad is driven by their tenants' needs.

Other REITs have launched entirely new businesses. A growing number have added private fund management businesses, which can create a relatively stable and attractive fee income stream that is distinct from property income and management fees. Analysts and investors must sort out how these operations should be valued and whether the potential conflicts of interest they present can be managed. As is so often the case, the transparency of disclosures will be critical to the outcome, especially for REITs that use such vehicles as an exit strategy for merchant building programs.

The capital market forces that the modern REIT era helped set into motion more than a decade ago continue to lead REITs to adapt to the new realities of a more liquid, efficient and global real estate capital market. As always, the market will be the ultimate arbiter of which ideas succeed or fail. These tentative new REIT models demonstrate again the flexibility of the REIT vehicle and the ongoing role REITs play in the real estate capital markets.