As we begin a new year, I’d like to pause for a moment to reflect on the year just ended. During the year, several important milestones were achieved. The long-awaited decision by Standard & Poor’s to include REITs in its U.S. indices breaks down a huge barrier between the investment community and the real estate industry, underscoring the fact that real estate operating companies have entered the mainstream. In addition, the industry’s profile was further enhanced when The Wall Street Journal included suggested REIT allocations in a series of model portfolios.

Moving forward, the industry must set its sights even higher—rather than merely being included in the S&P indices, public real estate companies must aim to compete effectively with leading S&P companies on key performance measures. Real estate companies utilize leverage at levels comparable to S&P companies, however, historically, return on equity and earnings growth have not measured up. As a result, over the last 10 years, the total rate of return realized by investors in real estate stocks has lagged the total rate of return of the S&P 500. Now is the time for real estate companies to continue the progress that has already been made by building on the strong management teams and well-conceived business strategies currently in place in order to “raise the bar” on the industry’s performance and to set a new, higher standard.

To reach levels of return on equity and earnings growth that are competitive with the leading companies in the S&P, the real estate industry will need to become less capital-intensive and more focused on sustainable cash flow and earnings growth as valuation measures. That is the way that stock multiples in this industry will be able to reach the levels that other industries enjoy.

It is evident that the U.S. was in an economic downturn that has been only exacerbated and prolonged by the tragic events of September 11. While no one can be certain as to when the economy will rebound, history has shown us that this downturn will ultimately end. I am convinced that, when it does, the strength of the public real estate industry’s balance sheet, the solid underlying supply and demand fundamentals, and the excellent management teams in place will enable our industry to compete on par with companies in the S&P. Investors will come to recognize what we already know to be true—the public real estate industry is a compelling investment opportunity.

William D. Sanders
NAREIT Chair