Real estate investment trusts (REITs) had a rough year along with most of the market in 2008. The worst ride for the group had to be for those that owned shopping malls, as the combination of the credit crisis affecting commercial borrowing and the consumer slowdown in shopping provided a one-two whammy that punished the stock prices as the underlying businesses struggled. (For insight on this income security that rivals small-cap stocks, read What Are REITs?)

Oh, Those Empty Malls
If you were at a mall this year, and from the numbers, not enough shoppers were, you probably noticed the growing number of empty and vacant stores. Even Simon Property Group (NYSE:SPG), the number-one mall REIT in USA, showed the effects of this climate, with its stock price falling from over-100 down into the 30s, before recently closing over $50, yet its earnings still held up fairly well. They are a solid company, though, and have weathered the storm so far.

Another big mall owner, the Westfield Group (OTC:WFGPY), also showed similar effects of the downturn in the economy in its stock price. Taubman Centers (NYSE:TCO) fared much the same. And so it went for most of the REITs which had large exposure to shopping malls.

Two REITs With a Different Look
Equity One (NYSE:EQY) and Boston Properties (NYSE:BXP) are two REITs that had hard years as stocks, yet their earnings were reasonably good, though Equity One had a recent negative quarter. Equity One has a slightly different mix of properties than the others, as it owns neighborhood and community shopping centers rather than the large indoor malls. These types of strip centers are doing better than the malls generally, and give the REIT more flexibility in terms of leasing, with a potentially more favorable mix of tenants. Boston Properties, on the other hand, is an office-building and commercial REIT, so its exposure is entirely different, yet it, too, showed the decline in stock price and the tough sledding as all other categories of REITs did.

Commercial Property and Its Paper
The shopping mall REITS suffered in addition to the consumer-whammy, (or in the case of office REITs, the reluctance of businesses to expand or renew office-space leases), from the credit crunch in the commercial mortgage backed securities' (CMBS) markets, where REITs often do their financing. REITs need access to this market for capital to build, buy or refurbish the commercial properties they lease.

Dividend Plays?
One thing you might notice when looking at REITs is that most of them are paying a high dividend. This ranges from about 5-10%, which is historically somewhat high due to their depressed stock prices. While an unusually high dividend is sometimes an indicator of distressed companies, this is not the case for the REITs right now; it is more a function of a beaten-down group of stocks, which have also attracted the short sellers. Still, with the credit crunch and consumers holding off on spending, these stocks and the fundamentals of their underlying companies should be watched carefully before buying.

A Hint of Hope?

Despite predictions that the commercial credit market will still be a tough environment for 2009, and that the recession will continue to hold down consumer spending and business expansion so that REIT stock prices may remain depressed, there are kernels of possible good news. The recent finding that we may already be midway through the recession rather than only at the beginning of it, as well as the possible gradual thaw of the commercial credit markets, may augur well for a rebound in these stocks beginning next year. One REIT, Westfield, has already predicted a positive increase in its earnings projections for the end of this year. So, despite some otherwise bleak predictions for them, 2009 may turn out instead to be a happier year for REITs.

For further reading on this investment product, see our related article The REIT Way.