When the current downturn in commercial real estate comes to an end, the U.S. real estate investment trust sector might look a lot smaller, according to participants at New York University’s 14th annual REIT symposium, “Black Swans, Black Holes… And the Light at the End of the Tunnel” on April 2.

With even the strongest REIT operators suffering from steep stock price depreciation over the past year and a half, many companies might no longer find benefits to remaining public. As a result, the U.S. REIT sector might shrink by up to 85% over the next several years.

Sam Zell, chairman of Equity Group Investments LLC, a Chicago-based privately held real estate investment firm, a speaker at the symposium, said at 134, the number of REITs remains too high. When the current downturn is over, he expects that only the largest players, with the best assets and the strongest balance sheets, will remain in the public market.

“We’ve reached a Darwinian moment,” Zell said. “Of the 100 plus REITs, maybe 20 or 30 are relevant. The small guys are going to go private.”

The REIT industry has been in a growth mode since the 1990s, when new laws allowed publicly traded real estate firms to pay substantially lower taxes than they would pay as private enterprises. Hence, between 1990 and 1994, the number of REITs in the country rose by almost 90%, from 119 to 226.

The problem is that given current worries about liquidity, most REIT stocks are being valued based on the underlying company’s maturity schedule rather than the inherent value of the operating business, according to Timothy H. Callahan, CEO of Callahan Capital Partners, a Chicago-based real estate private equity firm.

Any player with leverage above 65% and significant debt maturities coming up before 2011 remains suspect regardless of the quality of its assets. In the past year alone, the total market capitalization of U.S. REITs declined by approximately 30% to $134 billion from $191 billion in 2008.

That has left many companies with too little cash on hand, putting their very survival at risk, according to Steven Roth, chairman and CEO of Vornado Realty Trust, a New York City-based diversified REIT. In today’s environment, “If you don’t have equity, you are dead,” he said.

In the retail REIT sector alone, which includes 23 firms, total returns have fallen 36.6% year-to-date, after a decline of 48.4% in 2008, according to the National Association of Real Estate Investment Trusts (NAREIT), a national trade group.

Simon Property Group, the largest retail landlord in the U.S. with 246 million sq. ft., saw its stock price fall 62.9% in the past year, from a 52-week high of $106.43 per share to $39.95 per share at the open of the trading day on Monday. General Growth Properties, which owns the second largest retail portfolio in the country at 182 million sq. ft., but continues to struggle with mounting debt maturities, saw 98% of its stock value wiped away in the past 12 months, dropping from a 52-week high of $44.23 to $0.87 on Monday morning.

The popular opinion at the symposium was that General Growth, which already missed $1.2 billion in debt payments and has an additional $3.3 billion in debt coming due in 2009, has so far avoided a bankruptcy filing because its lenders and special servicers remain at a loss about what to do with its massive holdings.

Most industry insiders, however, including Zell, expect that the REIT will file for Chapter 11 at some point in the future, reorganize and re-emerge as a much more streamlined operation. A liquidation of General Growth at this point in time would serve no one well and its assets remain valuable enough to save it from total destruction, Zell said.

Also pushing for Chapter 11 filing was William A. Ackman, founder and managing member of Pershing Square Capital Management LP, a New York city-based hedge fund with a 25% stake in General Growth. “I think it’s a great company, it’s got great assets,” Ackman said. “It’s one of the more interesting investment opportunities I’ve seen in my career.”

In fact, the next several years should offer a number of great buying opportunities for both private equity players and those REITs able to survive the credit crunch and the stock sell-offs. These will come in the form of mergers and acquisitions of whole companies, as well as one-off asset buys at steep discounts.

One of the first inklings of things to come took place last week, when shopping center REITs Ramco-Gershenson Properties Trust and Equity One Inc. revealed they might be considering a merger. Over the next five years, such deals will begin taking place on a major scale, according to Roth.

For the healthy REITs, the game plan will be to raise equity. As Roth explained: “Buy a toy, the stock goes up, buy another toy.”