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Market Barometer: Real Estate Stocks

It’s no secret that many investors believe the next leg down in the financial crisis will be sparked by commercial real estate. But are some REITs oversold?

Just by looking at the numbers, you’d think so. The iShares Dow Jones US Real Estate is down 51% year to date.

And some of the market’s biggest REITs are trading at historically low multiples. Take Duke Realty , it’s currently trading at four times earnings while Macerich Company is trading at three times earnings.

From the numbers alone you might be tempted to dip a toe, but before you do, it’s important to understand the relationship between employment and commercial real estate.

Jobs: The X Factor

Job losses hurt demand for commercial real estate more than most anything else. Considering the nation lost over half a million jobs in November, it suggests a hard knock lies ahead for U.S. commercial property.

Why is that?

Commercial real estate is made up of office buildings, shopping centers, apartment buildings, hotels and warehouses. When people lose their jobs the vacancy rates rise. (Either directly, fewer office workers. Or indirectly, no money to make purchases or stay at a hotel.)

Because the values of buildings depend upon the rent they can generate, commercial real estate prices often tumble when unemployment soars.

And so far this year the U.S. economy has shed 1.2 million jobs, with about 40 percent of them having been office workers.

New York Blues

As is so often the case, some areas of the nation are harder hit than others, and in the case of commercial real estate those places are large markets.

In fact, one of the hardest hit markets is expected to be Manhattan. With 395 million square feet of office space, this market is larger than Chicago, Washington, D.C., Boston and San Francisco combined and largely dependent upon the financial industry because it takes up large chunks of very pricey space.

As banks and investment firms have consolidated and laid off workers, they have given up space.

The Trade

Taking all that into account let’s get back to the question at hand. Are some REIT’s oversold?

According to Deutsche Bank REIT analyst Louis Taylor the short answer is yes. However, as with all trades, you must be selective. “Lots more volatility lies ahead,” he says. So you have to look at the firms closely.

Taylor has a 'Buy' rating on Duke Realty , and Macerich Company because he feels all that bad news is baked into the stock.

However Taylor tells our producers that he remains cautious of REITs with big exposure to the NYC office market such as Vornado . He says, “Vornado will remain volatile as long as the New York City office market remains uncertain.”

Read More:

> More Job Losses Could Hammer US Commercial Property


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Trader disclosure: On Dec. 12th, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Najarian Owns (FCX); Najarian Owns (DRYS) And Is Short (DRYS) Calls; Najarian Owns (NUE) And Is Short (NUE) Calls; Najarian Owns (UYG) Calls; Najarian Owns (XHB) Calls; Finerman's Firm Owns (DSX), (MSFT), (UNH), (IBB); Finerman's Firm Is Short (USO), (BBT), (COF), (IYR), (IJR), (MDY), (SPY), (IWM); Seymour Owns (AAPL), (BAC), (F), (INTC), (MER); Seygem Asset Management Owns (EEM)

Louis Taylor is Sr. REIT analyst for Deutsche Bank
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