Beware: The market is overheating.

Yes, you read that right. Overheating. As in, frenzied. Frantic. Sure, development is at a crawl; fundamentals continue their steady decline; and finding financing in the capital markets is akin to trying to slide a penny out from under the door to the bank vault using every magnet, er, trick in the book.

But the reality is, things seem a little hurried these days. And I’m not talking about a ramp-up in distressed asset acquisition—though there are certainly enough extend-pretend-amend tales to rewrite lending handbooks, as well as the continued selling of notes by banks eager to get troubled assets off their books. (It’s one of many reasons why we devoted this entire issue to the outlook for distress in 2010 and beyond.) No, what I’m talking about is what’s unfolding with a different kind of paper, the kind of paper traded on Wall Street.

Last year, REITs raised more than $35 billion in hard cash by selling shares and bonds in a capital environment where private firms have struggled to find a single, willing institutional investor. Meanwhile, the Wall Street Journal reports that in the first quarter of 2010, more than two dozen REIT IPOs are expected, which will generate a whopping $60 billion-plus in cash.

Wait a minute. What did I miss? Why is real estate paper so hot? Sure, real estate is a great hedge against inflation in recessionary times, which explains why so much foreign money seems to be entering the United States and landing squarely behind large commercial sector transactions. But at the same time, we’re in this hot mess because of the missteps, overreaching, and, yes, frenzied activity in the single-family and mortgage business. There’s a reason CMBS is on the list of “bad words” in finance, right after Bernie Madoff—problematic debt stacks, an overbuilt real estate market, and greed led to our economy’s downfall.

Now, this isn’t to say that REITs haven’t shown strength—and resilience—over the past couple of years. While most observers believe multifamily REITs hit their bottom in the spring of 2009, those valleys were not quite as deep as those seen by their brethren in the office, retail, and hospitality sectors. At that time, multifamily REITs were playing it safe, stopping their development pipelines, hacking expenses, and scaling back their acquisition activity to reserve cash. After all, liquidity equals value in the REIT world.

And many REITs have slashed their spending. Only a handful of REITs closed sizable deals in 2009, including Alexandria, Va.-based AvalonBay Communities and Chicago-based Equity Residential. Meanwhile, some REITs, such as Rochester, N.Y.-based Home Properties, haven’t moved on a single deal for more than a year.

At this point, you may be wondering: If the activity coming out of the REITs is not frenzied, why on earth would I call the market overheated? To answer that, I turn to real estate kingpin Sam Zell, chairman of Chicago-based Equity Group Investments, who was interviewed by Peter Linneman, a chair at the Wharton School of Business, during a recent global real estate conference in New York. “The Street has made a mistake by valuing all the REITs the same,” Zell proclaimed. “We just came through the ‘flip’ era; if we open up the chest, there are hundreds of messed up deals.”

I agree, Mr. Zell. It’s the lack of discretion, the sweeping buy-it-all approach to all-things REIT that pervades every transaction on the Street recently, that most concerns me. In other words, the frenzy. The overheated activity. Call it what you will, but in my view, it spells trouble. And I’d like to hope that after what this country has been through the past few years, we could all act a little more wary and a little wiser. [M]