During the past two years, as real estate investment trusts (REITs) became more and more aggressive in buying properties, I kept cautioning the profession that REITs' expansionary zeal could last only as long as stock market conditions remained extraordinarily favorable. Unlike many promoters of REITs, I did not assume that such super stock market conditions had become permanent. Rather, I argued that stock market conditions would surely cool off - and once they did, REITs would lose their dominant position. That moment has now arrived.

As of mid-July 1998, when this is being written, REIT stocks have badly underperformed the S&P 500 in 1998. They also have much lower price-earnings ratios (about 11.9 on the average) than the average S&P 500 stock (over 22). Consequently, REITs are having more difficulty in raising new capital by floating secondary stock issues. That means they have less money with which to finance property acquisitions, mergers and new development.

This change in conditions has led many REITs to slow their formerly aggressive purchases of existing properties and to reconsider the new developments they were planning. Since REIT purchases formed around half of all institutional property acquisitions in the recent past, their slowdown has reduced upward pressures on property prices notably in many markets. This is particularly true concerning large portfolios of property, on which REITs were formerly the major bidders. It is also more true of apartments than other types of properties. True, in some markets, such as the Northern California market for suburban office and industrial space, prices of individual properties have not fallen at all, though they are not rising as fast as formerly. Other types of buyers - namely advisers and individuals - have replaced REITs as the most aggressive in the market.

Why have REIT share prices failed to keep up with S&P stock prices in 1998 - and actually declined for many individual REITs? No one can be certain, but several causes can be cited. A lot of "hot money" from stock mutual funds, including utility funds, that rode REITs when they were rising rapidly in 1997 - partly as insurance in case the general market fell - has bailed out now that the general market has continued to rise. This has a domino effect upon REIT share prices because of the relatively thin liquidity of even the largest REITs. When a few shareholders of REIT mutual funds ask to redeem their shares, those funds must sell shares immediately. Even small amounts of such sales in a short time can depress REIT prices notably, regardless of the economic performance of the REITs involved because of their thin liquidity.

Another factor is that the long run-up in property prices from depressed early 1990s levels - generated in large part by REIT acquisitions - has raised prices so high that it is now difficult for REITs to acquire property with high enough yields to increase their per-share funds from operations. Yet property prices cannot go much higher without calling forth a lot of newly built space - as is already happening. This means REITs' earnings growth from acquisitions must slow down. Investors, therefore, recognize that most REITs have become income stocks, not growth stocks, because of their requirement to pay out most of their earnings to stockholders each year. Hence investors award most REITs much lower price-earnings ratios than the S&P stocks they classify as growth stocks.

Yet another factor is that investors have been getting more discriminating among individual REITs. The best quality REITs are those that can "organically" grow earnings from their existing portfolios at respectable rates of increase, rather than mainly through acquisition. Stocks of those REITs have risen in price lately; whereas some high-flyers formerly overblown in price compared to their earnings (such as Vornado and Crescent) have declined. The net result has been that the class as a whole has gone nowhere.

Whatever the reasons for the stagnation of REIT share prices, I believe we are seeing a basic shift in the dynamic movement of property prices. We have experienced rapidly increasing market prices for commercial properties of all types since about 1993 and 1994 and even earlier. For over a year, I have been counseling real estate practitioners to sell investment properties because conditions were ideal for doing so: We were near the peak in values, buyers were aggressivelyseeking deals, and financing for buyers was readily available. I believe we have just passed the peak in property values for this cycle - barring some dramatic and unexpected development.

From now on, two forces will limit further price increases and will eventually lead to future price declines. The first force is somewhat less bountiful sources of buyer funding. The difficulty REITs will have in raising more capital is one cause. A general increase in spreads over Treasuries for all types of fixed-income investments is another cause of tougher financing. It makes bonds more competitive with real estate equities that have very low going-in cap rates (often below 8% on the West Coast). So the supply of money available to buyers is not as lush as it has been, and may become even less so.

The second force is a surge in new development across the entire nation in all types of property markets. We are now in the midst of a full-blown national development boom that will soon be adding more space to the overall supply than even continued economic expansion warrants. This added space will eventually put downward pressure on rents, and therefore, on property prices. Prices are now at or above reproduction costs in enough markets to generate a lot of new construction. Occupancy rates are already falling for modest-priced hotels and motels and will soon be leveling off for other types of properties in many areas. So we are now in a property price plateau at the peak of this real estate cycle. It is still a good time to sell if you can get prices not much lower than they were six months ago.

But as time goes on, the bargaining advantage will more and more shift from sellers to buyers. This can already be seen in the fact that some REITs are paying higher shares of their purchase prices with stock rather than cash, because they cannot raise all the cash for the prices sellers want. Another sign will be increasing mergers between very strong REITs and weaker ones, mainly all-stock deals that do not require raising any cash.

No conditions as sensationally beneficial as those aiding REITs in the stock market during the period from 1995 to 1997 can last forever, or even terribly long. True, REITs are by no means going to disappear, nor will they stop playing important roles in most property markets. But their former sprint to complete dominance in those markets - as heralded by some of their prophets - is now slowing to at most a walk.

* A lot of "hot money" from stock mutual funds that rode REITs when they were rising rapidly in 1997 has bailed out now that the general market has continued to rise.

* The long run-up in property prices from depressed early '90s levels has raised prices so high that it is now ifficult for REITs to acquire property with high enough yields to increase their per-share funds from operations.

* Investors have been getting more discriminating among individual REITs.