U.S. real estate investment trusts (REIT) should post another strong year largely on the strength of improving property fundamentals and savvy managers, reports Fitch Ratings. But the potential for another wave of privatizations remains likely as closely held buyers team up with others to secure strengthening portfolios.

Sustained job growth has contributed to higher occupancies throughout the REIT market. This, too, has allowed many REITs to boost rental rates and attract capital from investors. This rash of liquidity has sent acquisition costs through the roof, which could force many REITs to buy assets on a joint venture basis.

“We certainly believe that more REITs will enter into joint ventures to buy both single properties and portfolios,” says Steven Marks, managing director and head of Fitch Ratings’ REIT group. NREI sat down with Marks earlier today to discuss the 2007 REIT market. “It’s also an excellent way for REITs to diversify their earnings streams and lessen the equity risk of on-balance-sheet properties.”

Despite the colossal prices being paid for assets, Marks is less concerned about REITs piling on leverage. One reason is that most REITs take a more conservative stance on their loan-to-value (LTV) ratios than private real estate firms. The public players also are under pressure from shareholders and analysts to keep leverage at a sustainable level.

Marks believes that more REITs will see the value of teaming up on deals for another reason as well. “The public REITs want to tap into private capital sources, too. And the private players want to take advantage of the REITs’ savvy management skills once the deal is closed,” he adds.

One prime example of this trend is the current bidding war over office REIT Equity Office Properties Trust (NSYE: EOP). The rival bidding party consists of a listed REIT, Vornado Realty Trust, and two privately held real estate firms, Starwood Capital and Walton Street. It’s a mixed bag of real estate smarts, capital markets clout and key banking relationships.

“The combination of REIT management and private capital is extremely strong,” says Marks. “It’s also becoming less and less attractive for individual buyers to spend what’s required to close a deal today.”

Does Marks believe that 2007 will see as much privatization activity as last year? The analyst says it’s likely that more deals will occur in 2007 for all of the above reasons. He also expects the weight of available capital—which has hardly decreased over the past 12 months—to press its way into market through one-off property sales and portfolio trades.

“It’s just amazing how much capital is out there,” says Marks. “And that opens up a lot of possible deals.”