Real estate stocks skyrocket, but gravity could take hold.

BULLETPROOF.

That seems to be the attitude of investors in publicly traded real estate companies who have driven shares of eight of the 12 locally based companies to 52-week highs this month.

Confidence in the industry has extended across its subsectors, based largely on interest rates holding near historic lows, continued strong demand for housing, and a low failure rate for new commercial and residential projects. Companies whose assets are concentrated in office buildings, apartments and real estate services firms have seen share prices rise over the course of the year.

The local action tracks the nationwide trend that has seen returns at real estate investment trusts outperform the S&P 500 by 12.6 percent and the small- and mid-cap dominated Russell 2000 by 11.8 percent, according to a report by San Francisco-based financial services firm WR Hambrecht + Co.

But real estate is a cyclical business, and questions are already arising over how long the sector can run before it takes a bullet.

"We believe REITs are trading at the high end of fair value on fundamentals," wrote WR Hambrecht analyst Christopher Hartung, "though the recent trending down of interest rates creates favorable relative value proposition."

Hartung warned that REITs are exposed to more downside risk, especially those specializing in apartments and industrial properties, through the end of the year.

With a feared spike in interest rates not materializing, apartment REITs continue to face greater competition from for-sale housing.

Economic indicators in the general economy also point to troubled waters ahead for real estate companies, according to Hartung.

"Valuations are stretched, job growth is spotty and tepid, and while 2005 growth is accelerating, the peak quarter of earnings growth is still 20 to 36 months away," he wrote. "Especially with the latest economic data marginal at best, the demand-driven recovery should continue at a slower-than-expected pace. Therefore, we are quite cautious of REITs at current levels."

Riding the wave

Meantime, investors in local issues have been watching share prices climb.

Among the firms that hit 52-week highs in recent weeks were Pasadena-based Alexandria Real Estate Equities Inc. and Malibu-based LTC Properties Inc., both of which invest in and develop medical offices and laboratories. Alexandria was trading above $66 per share and LTC at close to $19. LTC is up more than 68 percent over the course of the last 12 months, the biggest gainer in the local sector.

Shares of office property owner L.A.-based Arden Realty Inc. hit a 52-week high of $33 in early September, while Kilroy Realty Inc., with an office and apartment portfolio, reached its 12-month peak of $38.46 the same week.

CB Richard Ellis Inc., the L.A.-based commercial brokerage and investment services firm that went public June 10 at $19, has risen steadily and reached a 52-week high of $22.90 in the second week of September.

Of the 12 real estate companies on the LABJ 200, only PS Business Parks Inc. has lagged. The company, affiliated with Glendale-based Public Storage Inc., is up 5.9 percent from the year-earlier and down less than a percent year-to-date.

PS Business Parks was downgraded to "sell" from "hold" by a Smith Barney Citigroup analyst on Sept. 9.

Hartung has started to dampen his enthusiasm on Kilroy, up more than 17 percent year-to-date and 33 percent over the last year. The report states that Kilroy, which Hartung rates as "hold," is overvalued.

"Kilroy has moved up 17 percent this year and at above $38 is getting too rich and ahead of its growth," he wrote.

Not everyone is starting to take a dim view of the sector. Some are waiting for an opportunity.

That's the approach of Dennis B. McAlpine, managing partner of Scarsdale, N.Y.-based equity research firm McAlpine Associates, who has been tracking Reading International Inc.

The L.A.-based company, a developer of movie theaters, has branched out into the construction of shopping centers in Australia and New Zealand, and so far the gambit seems to be working. Even though it has not hit new highs recently, it is still up nearly 35 percent from a year ago.

"Over the last year they have dabbled in different things and done well," he said. "Maybe they can do this too, but I guess I'm still taking the let's wait-and-see approach."

Company Name                                Headquarters

Alexandria Real Estate Equities             Pasadena
Arden Realty Inc.                           Los Angeles
Kilroy Realty Corp.                         Los Angeles
LTC Properties Inc.                         Malibu
Public Storage Inc.                         Glendale
Reading International Inc.                  Los Angeles

Company Name                                Core Business

Alexandria Real Estate Equities             Medical/laboratory
                                            development/investment
Arden Realty Inc.                           Office property investment
Kilroy Realty Corp.                         Office/apartment investment
LTC Properties Inc.                         Medical/laboratory
                                            development and investment
Public Storage Inc.                         Owner/developer of rental
                                            storage facilities
Reading International Inc.                  Movie theater/shopping
                                            center developer

Company Name                                YTD Stock
                                               Change

Alexandria Real Estate Equities                  8.7%
Arden Realty Inc.                                 4.3
Kilroy Realty Corp.                              14.1
LTC Properties Inc.                              24.9
Public Storage Inc.                                16
Reading International Inc.                         35