Unlisted REITs are using their strong cash positions to snap up deals while the credit crunch has thinned the ranks of competing buyers. In December, Inland American Real Estate Trust combined its cash with the assumption of the seller's mortgage to purchase the U.S. headquarters campus of drugmaker Sanofi-Aventis in Bridgewater, N.J., for $230 million. The Oak Brook, Ill.-based REIT raised more than $2.3 billion in investor capital in 2008, the most of any untraded REIT, according to Stanger.

Acquisition volume is down across the investor spectrum, but unlisted REITs have retained more momentum than other investor groups. Acquisition volume for unlisted REITs fell 51% in 2008, according to New York-based Real Capital Analytics. While that's a significant decrease in purchasing activity, it pales in comparison to the 70% drop in property acquisitions for traded REITs, and more than 80% for pension funds and institutional investors in 2008.

Unlisted REITs are “the one group that is buying into this market,” says Dan Fasulo, managing director at Real Capital Analytics. “They have been able, amazingly, to raise money in this environment.”

Illiquidity pays in this case

Unlisted REITs owe much of their recent strength to their shareholders' inability to quickly liquidate shares on an exchange. Some untraded REITs will buy back shares at a discount, but the companies aren't subjected to the sort of widespread selloffs by fearful investors that have beaten down REIT stocks.

Removed from the volatility on Wall Street, untraded REITs continue to attract investors and generate capital at a time when declining share prices have chilled investment in equity REITs, according to Martel Day, president of the Investment Program Association, a trade organization for direct investment companies, most of which are unlisted REITs.

“That has enabled them to purchase assets in the current environment, when real estate prices are depressed and cap rates have increased,” says Day, who also is director of business development at Oak Brook, Ill.-based Inland Securities Corp.

Ironically, the illiquidity that has left unlisted REITs flush with investor capital is one of the chief objects of criticism aimed at the sector. The model is designed to generate a profit for investors through a portfolio liquidation at the end of the investment term, not from the sale of shares before that date.

Before investing in an unlisted REIT, investors should determine whether they are prepared to park their capital in one place until a liquidation event occurs several years down the road, according to Nicholas Schorsch, chairman and CEO at American Realty Capital Trust, a non-traded REIT that invests primarily in freestanding, net-leased retail properties.

Liquidation can take the form of a portfolio sale or merger with another entity, a public offering, or a property-by-property selloff, with proceeds distributed among investors.

Investors who want to borrow on margin against their shares, or who seek a profit based on short-term appreciation, may not be a good fit for the untraded space, Schorsch says. “That's a tough conversation to have with investors.”

James Mattox, chief administrative officer at Addison, Texas-based Behringer Harvard, points to the positive side of investors' inability to trade unlisted REIT shares on an exchange: Upheaval on Wall Street doesn't drag down an unlisted REIT's value position through its share prices.