CHARLOTTESVILLE, VA-The Monday after Standard & Poor’s downgraded the US credit rating, the S&P 500 responded by promptly plunging more than 6%. REITs, of course, were part of the freefall, dropping as well. The depth of their plunge, however--nine percentage points, according to the SNL US REIT Equity Index--surprised some observers, according to a new report by SNL Financial. It was the largest decline since December 2008 when the index fell 19.3% and 15.2%, the research analyst firm says.

On Tuesday REITs recovered somewhat, with the index regaining perhaps 5% by mid afternoon. However the sharp slide reintroduces some questions that have been nagging at the REIT industry ever since it began its recovery from the recession. Namely, are REITs overvalued?

There is some evidence that pricing has gotten overheated in the space, SNL Financial’s Keven Lindemann tells GlobeSt.com. “REITs were trading at 17 times, on a price-to-FFO basis,” he says. “We haven’t seen levels that high since 2006 and the economic outlook by investors was much more positive than it is now.” In short, the question of overvaluation has been brewing for some time, he says, which likely led to the extreme sell-off on Monday. “Having the index drop 9% in one day is very unusual, and I do think it was, in part, a reflection of this concern.” It was also, he continued, an overblown reaction, as could be seen by the partial recovery the following day.

In the long term, Lindemann says, REITs are solidly positioned, although the debate about their valuations will no doubt continue. “Interest rates will continue to stay low and they are holders of hard assets,” he says. “They also will continue to find access in the capital markets.”