By Daniel Taub
Bloomberg News

Cohen & Steers Realty Shares, the third-best performer among 53 real estate funds, is gaining from investments in Washington, where vacancy rates are the lowest in the United States, and New York City.

The cities are "places where supply is constrained and there is job growth," said James Corl, chief investment officer for real estate securities at Cohen & Steers, in a telephone interview. "That is taking up the existing vacancy and will take rents up most dramatically over the next couple years."

More than 12 percent of the $1.9 billion Realty Shares fund is invested in Boston Properties Inc., owner of more than three dozen buildings in Washington, and Vornado Realty Trust of Manhattan. Realty Shares surged 38 percent this year and has gained for 12 of the 13 years since it was founded, according to data compiled by Bloomberg.

Corl, 38, runs the property fund with Martin Cohen, 56, and Robert Steers, 51, co-founders of New York-based Cohen & Steers, which focuses on income and is the country's largest holder of real estate investment trust (REIT) shares. Chicago-based research firm Morningstar Inc. gives its second-highest rating of four stars to the fund.

Realty Shares' growth may slow in the coming 12 months following a more than 30 percent advance in shares of real estate investment trusts this year, Morningstar analyst Dan McNeela said in an interview.

"Real estate stocks could pull back some just because they've been so strong in recent years," he said. "Investors got a scare in October with the interest-rate rise. That could happen again."

The Federal Reserve has increased its benchmark overnight lending rate five times since June 30, to 2.25 percent from 1 percent, causing speculation that mortgage financings would slow. The rate target will reach 3.5 percent by 2006, according to the median forecast of 61 economists polled by Bloomberg from Dec. 1 to Dec. 8.

Cohen & Steers Realty added 199,400 shares of Boston Properties last quarter, making it the fund's biggest holding. Vornado became its third-largest investment after the purchase of 66,300 shares. The other top holding is ProLogis, an owner of 1,940 distribution centers worldwide, in which the fund owned 3.1 million shares as of Sept. 30, according to Bloomberg data.

The companies meet Corl's expectation that funds from operations, a measure of cash flow used by REITs, will rise by a "double-digit" percentage next year, he said. Their price-to-earnings ratios are lower than that of the benchmark Morgan Stanley Real Estate Investment Trust Index, which has 121 members.

Boston Properties trades at 25.9 times earnings, Vornado at 31.3, and ProLogis at 26.1. The index trades at 41.9, according to Bloomberg data.

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