For some financial advisors, that's not enough to keep them from moving client money out of REIT funds, while keeping exposure to real estate through private partnerships. Jeff Leventhal, managing director and partner at Hightower Advisor, began investing in REITs for his clients in 2009 (after having sold off the asset class in late 2007). This past summer he pulled clients' money back out.
Leventhal said returns on REITS over the last five years have been stellar, but the environment is changing. "REITs are good at certain periods of time, but now in the investment cycle is not the time," he said, adding that when "interest rates are staying steady or falling, there are some benefits to REITs, but it's our view that interest rates are going up over the next three to five years, so it's not a great place to be." He prefers to invest 5 to 15 percent of client assets in private real estate partnerships due to the tax advantages they offer to high-net-worth individuals.
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Paul Tramontano, co-CEO of Constellation Wealth Advisors, is also investing in partnerships that allow direct access to multifamily apartment units. "We wanted a pure-play on apartment real estate, because we thought that was the way to get the most earnable income stream from our real estate investments," he said. But he isn't sour on REITs, specifically; rather, he sees them as a second-best way to generate real estate returns right now. For investors who don't have access to direct investments, Tramontano still recommends investing in real estate mutual funds or REITs.
"There is still time for investors to take advantage of the real estate recovery," Tramontano said. "We are in the middle of a turnaround in the multifamily real estate market. When the credit bubble burst, prices got silly and very attractive, and although prices have rebounded, we believe market fundamentals support strong investment opportunity for many years," he said.
Jeffrey Kolitch, portfolio manager of the No. 1–ranked Morningstar real estate fund year-to-date, the Baron Real Estate Institutional Fund—which has returned 20 percent this year, said many of the key conditions that are supportive to real estate are in place. Those conditions include improving demand for both commercial and residential real estate—due to rising occupancies and rents, limited construction activity and supply, improving credit conditions for commercial and residential properties and, even if rising, low interest rates. "Real estate performs well when those ingredients are all in place. We are in the midst of a multiyear real estate recovery with a promising outlook," he said.
Maybe the party on Easy Street isn't over, though it has slowed.
—By Leslie Kramer, Special to CNBC.com