Commercial real estate is the next sector to take a dive, negatively impacting the earnings of equity REITs, according to a Goldman Sachs analyst.

"REITs are no longer a relative safe haven," said Analyst Jonathan Habermann in his report, an outlook on equity REITS. "The worst is yet to come in our view."

The total returns of equity REIT, at about 3.9%, have run higher than Standard & Poor's 500 index of -10.2%. However, the report predicts that equity REITs will deliver returns of -10% this year, a trend that will continue through 2009.

Rising unemployment, higher costs of living, and slowed demand for real estate are some of the many factors eroding the fundamentals of commercial real estate, the report notes. Also, a rising unemployment rate will result in a reduction of real estate needs by corporations.

Habermann warned that down cycles in commercial real estate tend to lag behind other trends. Following the 2001 recession, commercial real estate did reach its bottom until 2003, the analyst noted.

Occupancy rates and rents peaked in 2007 and will weaken throughout this year and next, he said. This will translate into slower operations growth for equity REITs.

Also weighing down the sector—as the cost of debt has gone up, limiting refinance opportunities, property values have fallen.

Nonetheless, equity REITs are trading at roughly 15 times 2009 FFO (funds from operations), well above their long-term average of 10 to 12, the report notes.

Habermann cautioned over REITs that focused on short-term leases such as apartments and those that utilize acquisitions as a growth strategy.

"We continue to see downside risk of 10% or more from current levels," the analyst wrote.