Throughout much of the 1990s and early 2000, capital preservation was an endangered investment species. That's not surprising, given the fact that the Dow Jones Industrial Average soared from 4000 in 1994 to 11700 in January 2000. A conservative, low-risk approach to investment seemed out of touch amid a raging bull market. Led by a technology revolution, the American economy appeared invincible.

But over the past two years, we've become painfully aware of our vulnerability. The Internet boom went bust, leading to a recession and a subsequent economic recovery that remains fragile because of weak corporate earnings. The terrorist attacks that occurred on Sept. 11, 2001, have deeply affected our nation's psyche. And as 2002 comes to a close, it looks as if a war between the U.S. and Iraq is imminent, casting further doubt as to whether the momentum of the U.S. economic recovery can be sustained.

In the wake of two tumultuous years on Wall Street, investors are revisiting the strategy of capital preservation. During periods of uncertainty, big and small investors alike have a low tolerance for risk. That's why commercial real estate continues to be a safe haven. Investors will settle for returns of 6% to 8% on real estate vs. double-digit losses in other asset classes.

The national office vacancy rate ranges from 14% to 17% and is still climbing, according to a consensus of national brokerage companies. That's not good news, yet investors' desire for secure revenue streams explains why well-located, well-leased office properties in major markets continue to sell at a premium.

Putting Investment Choices Into Perspective

The recent performance of information technology services giant Electronic Data Systems (NYSE: EDS) offers insight into why investors remain skittish about the broader equities market. EDS stock closed at $17.22 per share on Dec. 3, down about 75% from its 52-week high of $72.35. The woes of EDS, an established company with a good track record of performance until this year, are not unique. The stock prices of myriad technology companies fell faster than a bungee jumper and have been slow to recover.

By comparison, Equity Office Properties (NYSE: EOP) — the largest publicly traded REIT — closed at $25.94 a share on Dec. 3, down about 17% from its 52-week high of $31.36. No, that's not a stellar performance, but compared with the broader equities market, EOP still looks healthy. Everything is relative. Additionally, EOP stock generates an annual dividend of $2 per share, which computes to about an 8% dividend yield. In this investment climate, healthy dividends are especially important to investors.

As I write this column, the Dow Jones Industrial Average is on an eight-week roll, but that's little consolation for investors who have watched the valuations of their portfolios fall by 50% or more during the past few years. The memory of the technology bubble will not be forgotten anytime soon.

As an asset class, real estate clearly has benefited from all the economic uncertainty. The question to be answered in 2003 is whether the flood of capital that has poured into the industry over the past few years is a temporary condition or a fundamental shift in investment strategy. My hunch is that capital preservation is not a permanent condition.