Do the REIT Thing? When it comes to returns on real estate, think long-term investment.

Although the once torrid growth in the value of land and officespace has slowed down lately, there's no question that realestate investment trusts (REITs) have been at the head of the assetallocation class since the spring of 2000. REITs gained an averageof 3.6 percent last year, a number that won't setinvestors' hearts aflutter-until you consider that the S&P500 Index lost 22 percent over the same period. The gap betweenREITs and stocks, which was even wider in 2000 and 2001, narrowedbut did not disappear in the first quarter of this year.

If you're thinking of REITs as one of the last safe havensfrom the bear market, however, think again. Even with the war inIraq in the rearview mirror, businesses are cautious aboutexpanding into new and bigger office space. So vacancy rates areedging higher, and rents are slipping lower, which is not therosiest of scenarios for investors in commercial real estate. Thesluggish economy has put a lid on rental increases for apartmentowners, too, and mall development companies are dependent onconsumer spending picking back up in the near future.

Put it all together, and the glory days may be over for REITs asfar as this investment cycle is concerned. "There is a riskthat you won't get an increase in [real estate] demand laterthis year and into 2004, even as the economy comes back," saysRalph Block, REIT portfolio manager for Oakland, California-basedBay IsleFinancial. "If you don't get an increase, you'llsee an awful lot of office and apartment REITs paying more individends than they get in rent."

The result could be especially painful for investors who counton REIT dividend yields, which average a juicy 7 percent. The lasttime the industry struggled, in the late 1990s, a number of REITscut or suspended altogether their dividend payments. Stock pricesfell more than 80 percent in some cases.

Not all REITs are created equal, of course. Regional malloperators, for example, may fare better in this climate than REITsfocused on office or apartment buildings. But Block says chasingreturns in real estate is no easier, or smarter, than chasingreturns in technology stocks. He recommends deciding whatpercentage of your portfolio should be allocated to real estate andleaving it that way. "If you believe in REITs as a long-termproxy for real estate and a good portfolio diversifier," hesays, "I don't see any need to change your allocationbased on the headlines of the day."

Scott Bernard Nelson is a financial writer at The BostonGlobe.