After Two-Year Slide, REITs Showing Signs of Recovering

"Is this a buying opportunity? Yes, but one has to be very selective with REITs," Slatin says. "Most of the companies that have issued equity in the last year are good companies on the up and up and have long-term solid growth prospects."

Some with a more cautious view are buying convertible REIT shares just in case the economy remains unstable.

Convertibles provide yield while also offering protection if share prices get hit.

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Average yield for REITs now runs above 7 percent.

"REITs have cut dividends to preserve capital," says David Grenier, president of Cutler Capital Management in Worcester, Mass. "We find by being in the convertibile securities we're less likely to lose that income stream. So we've become more defensive."

Among the companies Grenier finds compelling include Essex Property Trust , Health Care REIT and Lexington Realty Trust .

"If you make the call that the whole economy roars back quickly, you're still in the game becaue your convertible security will increase in value," he says.

Shakeout Coming?

Another variable in REIT investing is how the industry weathers the consolidation likely to occur, just as it has in financials and others hurt during the credit crisis.

As a fresh round of debt comes due on commercial real estate holdings, portfolio managers are watching closely to see which companies will have the most staying power.

"Good companies, or perceived good companies, will have access to the capital markets. But companies that don't have sustainable cash flows ... are going to be looked at differently," Grenier says. "It's that grouping here that will really struggle and then roll over into another phase, which will be a merger and acquisition phase."

A larger-than-expected surge in loan defaults could cause further turmoil in the real estate market and create a more challenging investing environment.

"It's very hard to underwrite what the future will be right now. The biggest component is it's so hard to source debt," says Jonathan Schultz, managing principal of Onyx Equities, a Woodbridge, N.J.-based high-end commercial investor. "I just think everybody's still in a little bit of denial of what real estate is really worth."

Optimists, though, think most of the bad news is already priced in to the market, making solid REITs and real estate as a whole a bargain.

"What you would call opportunistic buyers are considerably more active than even just two months ago," says Ross Moore, executive vice president of market and economic research at Colliers International, a Boston-based real estate investor. "There's a perception that we may have hit bottom and now is the time to start looking."

Despite what he calls "a tough slog ahead" Moore also sees REITs, particularly those that focus on industrial properties, as solid value over the long term.

"It's what's baked into the price that really matters. Obviously real estate is a tough sell bearing in mind what's going on in the residential world," he says. "The flip side is a lot of the bad news is known so prices have come off. If you're getting into REITs now, over the next five years you're probably going to do very well."

© 2012 CNBC.com

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