Real estate investors are getting mixed signals. Problems in the housing market persist, but real estate investment trusts have offered investors nearly 30 percent returns in each of the past two years. Could they do it for a third?

REITs offer an easy way to invest in commercial real estate, such as companies that own apartment buildings, shopping centers or office parks. REITs trade like stocks, but by law, they must pay out 90 percent of their taxable income to shareholders as dividends. Investors can buy individual REITs or funds that track industry indexes.

Reasons for caution

• Rising interest rates, Part 1: Analysts expect a stronger economy to lead to higher rates. That could lure income investors away from real estate and into bonds.
• Rising interest rates, Part 2: Higher interest rates will make borrowing more expensive for REITs.
• High prices: The big runup in prices means REITs overall recently traded at nearly 17 times their expected funds from operations in 2011. That's higher than their five-year average of 14 times.

Reasons for optimism

• Rising interest rates, Part 3: It makes sense that rising rates would hurt REITs, but the history showing that is scant, Janney Capital Markets says. There have been a few short-term cycles of rising rates, such as in early 2006, when REIT prices climbed.
• The improving economy: A strengthening economy would mean greater demand for office space.
• Expected dividend boosts. Increased demand means REIT dividends could rise 10 percent to 20 percent annually through 2012, Morgan Keegan says.

Bottom line

Analysts expect more gains for REITs, but don't forecast anything like the last two years. KeyBanc Capital Markets, for example, expects total returns of 5 percent to 10 percent for the industry in 2011, with more than half of that coming from dividends.

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