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.