By Rick Glaze

The broad stock market averages continue to move higher against a backdrop of falling energy prices, higher wages, strong corporate earnings and reasonable valuations. But trees don’t grow from the sky, and the markets will undoubtedly let a little air out of the balloon at some point.

The institutional real estate market has eclipsed the strong stock market indexes this year - and for several previous years. What is driving that rise in price? Institutional real estate is often measured by the performance of a class of securities called Real Estate Investment Trusts (REITs).

Congress established

REITS with some unique qualities. They must pay 95 percent of their earnings to shareholders. They offer special tax considerations, such as protection from corporate and double taxes. Some trade on major exchanges, which makes them as liquid and tradable as a stock. A REIT may include a variety of types of property like shopping centers, apartments and office space, or it might specialize in one of those areas.

The underlying property determines the value of a REIT. For instance, if there are buyers for a shopping center at $30 million, then you could conclude that it is worth that price. But often REITs, like other real estate, are valued by the amount of the dividend paid to investors. So, one paying 6 percent would be worth more than one paying 3 percent. In today’s rising interest-rate market, the value of the dividend might be considered less attractive, but to date that has not happened.

The robust economy has put office space, shopping centers and apartments in high demand, so investors are buying REITs

for the dividend yield and potential appreciation as well as the attractive properties. A sound investment plan might utilize this type of institutional real estate through REITs as part of a diversified approach. However, REITs may not be suitable for all investors. As with any investment, there are risks associated with REITs, such as geographic concentration and share-value, market fluctuation.

Rick Glaze is president of Glaze Capital Management Inc. of Los Altos and a General Securities Principal offering securities through First Allied Securities Inc. For more information, e-mail Rick@Glazecapital.com.