"There's a tendency for people to think that if property values are going down and they own REIT stocks, then that means their REIT stocks will go down — and that, historically speaking, is not the case, because REITs lead the rest of the market," said Brad Case, an economist and vice president of research at the National Association of Real Estate Investment Trusts in Washington. "Returns to REITs lead the returns to real properties."

Equity REIT share prices have tended to decline, trough and rebound a year or two ahead of commercial-property prices shown on the NCREIF Property Index, from the National Council of Real Estate Investment Fiduciaries in Chicago.

If this trend holds up during this cycle, equity REITs, which were up about 2% in the first eight months of 2008, should continue ticking up even though commercial-real-estate values will likely be falling, Mr. Case said.

Investors buy and sell REITs based on how they expect that economic, legislative and other issues will affect real estate demand, rents and values a year or more from now. REITs tend to react faster to changes in market conditions be-cause analyst coverage, SEC filings and company disclosures make it easier for investors to scrutinize and react to real estate deals in the public markets.

"When they think those returns are going to go down in the future, they don't wait to sell their REIT stocks; they sell them right away," Mr. Case said. "That's why REIT stocks went down a year and a half ago."

Indeed, REITs were on a tear, outperforming the Standard & Poor's 500 stock index for seven consecutive years before peaking in January 2007. At that point, investors, sensing frothy pricing, a weakening economy and a pullback in the credit markets, began selling off REITs based on the belief that the market had peaked and that demand for real estate would wane.

For the next 14 months, equity REITs took a hit, falling 26% even though commercial-property values in the private market continued to hold their own until the second quarter of this year, according to the NCREIF index.

Mr. Case cited glaring similarities between the performance of REITs during the past year and REIT trading activity that led up to previous downturns. The recent 14-month decline in equity REIT prices "is very consistent in duration and severity" to the sell-off that preceded the downturn of the late 1980s, he said.

"In the 1980s, REITs declined for 13 months, and they lost 24% in total return," Mr. Case said. "In the most recent decline, they declined for 14 months and lost 26%."

During the crash of the late 1980s and early 1990s, data showed that REIT prices started falling about a year ahead of the meltdown. They corrected prior to the broader commercial real estate market — and they started recovering while broader real estate values were still trending down.

However, the lag time can vary from a few quarters to as much as two years for changes to play out in the private market.

During the 1980s crash, REITs peaked in late 1989, while commercial-property prices topped out in late 1990. REITs reached a low at the end of 1990, but commercial-property values didn't bottom until the first quarter of 1993.

Mr. Case expects a similar lag this time.

"It takes an average of four or five quarters for a turn in the public markets to show up in the private markets," though that lag can stretch out to two years, said Michael Grupe, executive vice president of research and investor outreach at Nareit. However, he conceded that there are no guarantees that REITs won't sell off again given the "unprecedented turmoil" in the financial and credit markets.

"I think the downside risk [to REITs] at this point is small ... The data suggests that most of the [REIT] price decline is behind us,"Mr. Grupe said. "But that does not preclude the possibility that we could retest that bottom."

Mr. Case agrees, noting that commercial property values have been falling because of price, not deteriorating real estate fundamentals. He said that pricing had become overinflated due to the glut of cheap private-equity money that had been chasing after real estate.

Mr. Case sees similarities between illiquid, highly leveraged, secretive limited partnerships, which took the biggest hit in the early-1990s crash, and private-equity real estate funds today. In the 1990s, the demise of limited partnerships led to a surge in REIT initial public offerings, which could happen again this time around with private-equity real estate funds, he said.

REITs have proven to be an attractive long-term investment for people who are willing to hold the stocks for at least two years, Mr. Case said. REITs have generated annual returns of 13.8% on average during the past 30 years, he said.

But not everyone is convinced that history will repeat itself during this cycle.

"The public markets are generally forward-looking," said Tony Paolone, an analyst with New York-based JPMorgan Chase & Co. However, "there are too many moving parts" in the financial and credit markets to draw the conclusion that REITs won't go down again, he said.

The Goldman Sachs Group Inc. in New York recently reiterated its view that REITs will generate negative returns of at least 10% during the next year. In a note, analyst Jonathan Habermann cited higher debt costs, lower industry liquidity, dividend cuts and slowing funds from operations growth for his bearish call.

E-mail Janet Morrissey at jmorrissey@investmentnews.com.