No, they’re not making any more farmland. But they are building an awful lot of apartment buildings, strip malls and office parks in Central Iowa and across the United States, and some observers say the supply appears to be outpacing the demand.

If that’s true, a period of sizable and nearly automatic profits for real estate investors might be coming to an end. “Anybody with any sense of logic is concerned about the price of real estate now,” said Don DeWaay, CEO of DeWaay Capital Management. “The fundamentals are not the same as they were four or five years ago. We were buying things with a lot of upside potential. Then all of a sudden the stock market goes sour, real estate is rediscovered, and in a short amount of time, we have seen great returns.

“What confounds me,” he said, “is that people tend to lose sight of the fact that things don’t go up forever. People are leveraging real estate these days, when there’s a virtual certainty that there are going to be higher interest rates. That’s going to put a squeeze on cash flow.”

Real estate investment trusts have been an enormously popular method of getting a piece of the real estate boom — a record $6.9 billion entered the sector in 2004, representing a 45 percent increase from the previous record of $4.75 billion set in 2003 according to California-based AMG Data Services, which tracks mutual fund money flow and holdings data.

Those investors have done quite well. In both 2003 and 2004, REIT returns topped 30 percent. However, the funds have shown increased volatility in 2005 and actually suffered a 9 percent loss in August. During the week of Aug. 10, $322.3 million drained out of REIT mutual funds.

The people who run those funds have shown a lack of confidence, too. Among REIT managers and directors, sellers of company stock outnumbered buyers 173-1 in the second quarter this year, according to a report by Lehman Bros.

“More than REITs, it’s the TICs (tenant in common investments) that are absolutely on fire as a real estate investment alternative,” said Todd Millang, a commercial real estate broker with CB Richard Ellis/Hubbell Commercial in West Des Moines.

The driving force behind TICs has been the use of 1031 property exchanges. “A REIT is a security, so you can’t put 1031 money there,” Millang said. “A TIC is a vehicle where you can take your proceeds from the sale of property, join a group and buy an apartment building or a strip mall. Somebody else will manage it and hopefully every month send you a check.”

But the return on TICs is far from guaranteed. “The thing that’s obvious is that people rarely watch the fundamentals when they make investments,” DeWaay said. “When things go up in value, it’s diminishing your return potential and increasing your risk exposure. You make almost all of your money the day you buy something, not the day you sell it.”

DeWaay doesn’t believe that we’re seeing a real estate bubble getting ready to burst, but does expect a gradual slowdown in building and buying. Higher prices for construction materials might actually be beneficial, he said. “That will slow development, and we’ll start to see the supply and demand paradigm shift; we won’t see lots of vacancies in commercial real estate.”

“The last couple of years have been incredible in our market,” Millang said. “The demand has been so large from people taking money out of standard investment vehicles and investing in real estate. In the last couple of years, groups like Principal (Financial Group Inc.) have been reallocating pension plans and 401(k) plans into real estate. That puts pressure on institutional groups to buy real estate, and it trickles down.”

As that demand raises real estate prices, it gets harder to find an ideal piece of property to buy. “The spread between what someone is borrowing and what they’re buying has compressed to where only large institutions and groups can buy some of the ‘trophy’ properties,” Millang said.

Skyrocketing prices in booming parts of the country such as Florida and Southern California, have pushed some investors to look at smaller markets such as Central Iowa. Investors from outside the state have made several significant purchases of commercial real estate in Central Iowa this year, and according to Millang, that makes it “a great time to sell.”

Millang predicted a trend away from real estate among ordinary investors. “Inherently, people perceive real estate as a risky investment; that’s because of a lack of knowledge,” he said. “You have to understand the fundamentals, which in essence can be a full-time job. You’re competing against people who have been doing this for 20 years. Also, it can tie up a lot of money that’s not very fluid, and something can go wrong, leaving the investor sitting there with a financial burden that’s costing them money instead of making money. Those that have invested will start taking their losses or winnings and get back into something that’s easier to track, like the stock market.”