As Craig Thomas, SVP and director of research for Torto Wheaton, explained during the presentation, 11% average total returns for the past three years were nice, but "4.9% of that came from cap-rate contributions." Now those contributions are about to go away, and "in 2006, those levels of return are going to have to come from somewhere else. The period we have enjoyed is ending." In a post-meeting conversation, Thomas noted that he expects cap rates to rise "primarily because of their close correlation with 10-year treasury yield."

"The easy money's been made," said company principal Raymond G. Torto, "and returns going forward will be in the single digits." Prices are going to stay high, he added, but with interest and cap rates continuing to creep up, the result will be lower returns. He termed the coming trend the post-cap rate-compression era.

In terms of the ongoing question of whether or not there is a housing bubble, Torto indicated that indeed there is. With 4.4 million housing starts from 1996 to 2005 and the slowing of new households, we face a serious excess supply of housing.

But none of this amounts to a major correction or a reason to shed your real estate holdings, the duo said, and "We expect continued moderate improvement in leasing," Thomas projected. Investors are simply "going to have to do their homework."

Even those novice investors who flipped from the stock market to real estate because of the returns will not vote with their feet and exit the market in droves. Torto pointed out that even if the returns become more comparable with other alternatives, real estate will still offer these private investors much needed investment diversification.

If there is a risk it would come in the event that interest rates do not rise--something the two analysts are betting against. "As fundamentals improve and prices rise," Torto said, "if interest rates fail to rise cap rates will continue to fall. We're already above replacement cost and we risk overbuilding."