Real estate investment trusts are not just the darlings of the stock market anymore. The bond market is also going like gangbusters for REITs.

As more REITs have achieved investment-grade blessings from the rating agencies, the unsecured debt market has become an increasingly popular source for acquisition capital.

This year REITs have raised $6.138 billion from 94 issues of unsecured debt. That's 29% more than the $4.753 billion raised in all of 1996, according to the National Association of Real Estate Investment Trusts. "Unsecured debt has been a more effective use of debt, and as REITs continue to be the investment vehicle of choice, I think we'll continue to see even more," said Clint McDonnough, national director of REITS for Ernst & Young Kenneth Leventhal Real Estate Group.

"If banks have not looked into providing debt for the REIT marketplace, they without question should," Mr. McDonnough said.

Big real estate lenders like NationsBank Corp., BankAmerica Corp., and First Union Corp. that have recently linked up with investment banks have acquired the capability to lead these offerings and are well suited to provide this product. It also bodes well for the REITs, which now tend to deal with fewer financial institutions that provide a wider range of products and services.

About 41% of equity REITS are rated. And the size of the offerings has increased, too. REIT analyst Chris Haley of Wheat First Butcher Singer says typical bond issues have grown in size from roughly $50 million several years ago to between $100 and $200 million these days.

"That is paralleling the growth in the size of these companies," Mr. Haley said.

Indeed, industry growth has been phenomenal. Today the average market capitalization of a REIT is $732 million; that's a huge spike from the $123 million average just five years ago. Equity REITs represent almost 9% of the $3 trillion real estate industry.

In light of that, a fundamental shift in perception has occurred, says Charles Lowrey, co-head of real estate investment banking for the Americas at J.P. Morgan & Co.

"REITs are now accepted in the marketplace as corporations that happen to be in the real estate business, not as real estate companies that happen to be public," Mr. Lowrey said.

With the increasing popularity of unsecured debt, spreads have narrowed tremendously. Real estate experts agree that a BBB-rated company can borrow money over 10 years for 50 to 100 basis points over the London interbank offered rate. Two years ago, that would have cost a REIT about 250 basis points over the Libor.

"Spreads will continue to tighten as more banks are competing to do that business," Mr. Haley said.

The unsecured bond market for equity REITs really began in 1992, when there were only about six major investors. Now that group has swelled to 130.

"There is a large acceptance in the market for these securities, which has driven the pricing down, which in turn drives issuance,"Mr. Lowrey said.

And now that spreads have come down, the unsecured debt market has become extremely competitive with mortgage refinancings. Since the REITs do not have to pay a premium for unsecured debt over mortgage financing as they did a few years ago, unsecured debt is particularly appealing, because it provides the benefits of timing, pricing, and opportunistic access to capital that mortgages do not.

Although the debt is unsecured, REITs are driven by cash flows from diversified pools of properties and are not as subject to individual property events, said Phil Wharton, chief executive officer of Property Information Exchange, an independent information service.

"Also the risk that the values are overstated is not going to impact the properties as quickly as it did in previous cycles," Mr. Wharton added.

Asking prices for office property have risen to $86.55 per square foot,almost 8% more than last year, according to Property Information Exchange. In the retail market, prices have increased 15.2%, to $114.61 per square foot, from $99.42 in 1996.

Multifamily property is the only sector which seems to have slipped, by almost 2% nationally, to $57.69 per square foot, from $58.75 per square foot last year.

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