The Federal Reserve's recent rate cuts also seemingly provided short-term support to REIT funds. After the Fed reduced short-term rates on Jan. 22 by 75 basis points to 3.5%, U.S. real estate benchmarks soared. In fact, the Dow Jones U.S. Real Estate Index moved up by double-digit percentages the next day.

Lots Of Uncertainty Remains

But markets remain in a conundrum of sorts. The latest research from Green Street Advisors indicates that privately held commercial property values still might have room to correct. That's due to a gap between how much private properties are being appraised and sold at today and how much public markets have corrected in the past year.

"Basically what they're indicating is that private appraisal and transaction levels disclosed haven't corrected as much as the public real estate markets," Steinhilber says.

While he believes that valuations on REITs are down, "they're certainly not at historically low levels. We've just returned to median longer-range spreads to Treasuries."

Steinhilber has also started nibbling at REIT ETFs. "They're a good value relative to bonds, but not especially as good of a value compared to the broad stock indexes," he said.

In the past 10 years, REITs have averaged close to 6.3% in yields, Steinhilber notes.

"It's not time yet to put on a full allocation to REITs in our accounts from anywhere between 5-10% of total assets," he added. "We're averaging around 3% right now."

Steinhilber has been buying some Vanguard REIT ETF (AMEX: VNQ). "It has the lowest expense ratio on the market and provides broad exposure to U.S. REITs," he said. "In terms of portfolio construction, it's pretty comparable to IYR."

Credit Crisis Still Looming

Then there's the still-spreading subprime crisis which has hit mortgage REITs hard.

"But it really hasn't made a direct major impact on other REIT sectors," said Robert McMillan, an industry analyst with Standard & Poor's equity research services group. "For example, retail REITs sign long-term contracts with customers. And there are very few retail bankruptcies right now."

For ETF investors, checking to see what different funds hold in each sector of real estate could prove beneficial.

"People tend to put all REITs in the same bucket," McMillan said. "But there are different sectors with different fundamentals. On most of the sectors we're neutral at the moment, but on retail and industrial we're positive."

If job growth slows, office space could slow. But on retail real estate, consumer spending is healthy—even though it's slowing, says McMillan. "Retailers are still expanding, even though at a slower pace," he said. "Retailers are now doing their store planning looking at 2010-2011, when economic prospects should be better."

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