DORAL, FL-With cap rates at historically low levels and real estate prices on the rise in most property classes, the fundamentals of the REIT industry are solid, said participants of the Nareit Law & Accounting Conference Thursday at the Doral Golf Resort & Spa.

In a panel discussion called "State of the Real Estate and Capital Markets," participants added that, although the industry is strong, activity in 2006 was slower than 2005. "We've had a very strong run but we're starting to see some moderation," said Ron Donohue, of Hoyt Advisory Services. "The big question is how long will the cap rates remain at their current level? There an enormous amount of money on the sidelines waiting for cap rates to come up and prices to come down."

In addition to Donohue, other panel members included Dennis Oklak, of Duke Realty Corp.; Paul Fisher, of CenterPoint Properties Trust; and Lisa Sarajian, of Standard & Poor's Rating Services.

Donohue identified the top investment cities in 2007 as New York City; Washington, DC; Los Angeles; Seattle; Austin; San Francisco; Orlando; Honolulu; San Jose and San Diego. He added that top investment classes in 2007 will be multifamily rental properties for moderate income, full services hotels, multifamily rental properties for high income, warehouse industrial and community and neighborhood shopping centers.

In a presentation outlining data for Duke Realty Corp.' portfolio, Oklak said in June 2003, a low point for the company, Duke's 104.5 million-sf portfolio was 87.8% leased. In December 2006, the company's 104.2 million-sf portfolio was 95.5% leased. "In 2006 we experienced the largest net absorption we've had in the company's history," he said.

In 2006, the company completed $6 billion in capital transactions, including the renewal of a credit line and the acquisition of a company in Washington, DC, among other transactions. "Cap rates have really compressed to historic lows. The question is, 'will this change?'" Oklak said. "I believe that there is some potential for cap rates to stay low and maybe even go down a little further."

Sarajian said there was $100 billion in merger and acquisition activity in the REIT industry in 2006. Despite the high level of activity, the impact on debt investors was relatively benign. "The ratings impact was dramatically less destructive relative to the wider corporate industrial universe," she said. "This is entirely due to the existence of extremely investor-friendly bond covenants."

Sarajian added that 2007 will likely bring more merger and acquisition activity. "We do think M&A will be part of the landscape, but the reality is it's been a part of the REIT landscape since the early to mid-1990s," she said.