If it were a made-for-TV movie, "The Return of the REIT" would tell an unhappy story of boom and bust in the real estate industry, as only the American economy can script it.

Created by Congress in 1960 to let small investors get into big-ticket real estate by pooling money, Real Estate Investment Trusts (REITS-rhymes with beets) were all the rage in the early '70s. Then came the mid-'70s -- years of overbuilding, the oil embargo, high inflation and tight money -- and the real estate industry all but self-destructed.

Particularly hard hit were REITs that specialized in mortgage lending. But others suffered as well. REITs that invested their money in property, such as Federal Realty Investment Trust in Bethesda, escaped the worst of the trauma. Federal enjoyed good years even throughout the bad times, but now times look better, and so do Federal Realty's fortunes.

The 23-year-old real estate investment firm recently moved from the American to the New York Stock Exchange. Merrill Lynch gives Federal Realty a 1-1 rating, which means the brokerage firm recommends purchase of the stock on both a short-term and long-term basis. And Steve Guttman, the 38-year-old president of Federal Realty, is working out in a nearby gym to stay in shape for the real estate adventures that lie ahead.

One sign of the dramatic national improvement in the economic climate for the kind of business organization Guttman operates is the latest issue of Pensions & Investment Age, which carries the headline: "REITs Making Comeback Among Funds."

The story reports efforts by Salomon Brothers and Merrill Lynch to market two huge new REITs for Equitable Life ($181 million) and Investors Central Management ($121 million). The trusts would invest in major commercial properties in an effort to attract investment from pension funds.

"You had a whole generation of bank officers that were burned by loans with REITs," said Guttman, who notes happily that the bad image is fading. "REITs have never been more in vogue than they are today."

The big advantage enjoyed by REITs is that they pay no federal taxes if they follow government rules and distribute 95 percent of their net annual earnings to their shareholders.

One key reason for the comeback is a proposed tax law change that would crimp the style of real estate operators who have attracted investors with promises of big write-offs. The widespread use of real estate as a tax shelter has produced an industry with distorted economics and has been rough on those whose interest in real estate is in long-term investment, according to REIT operators.

"If the tax law is changed," Guttman said, "real estate is going to be traded again on an economic basis, not on a tax-shelter basis, and you won't see as many weird and queer financing deals that distort the price of real estate. What you're going to see is a growing emphasis on real estate for investment purposes, which is what the REITs are all about."

If additional proof is needed of REIT recovery, it is to be found in the share value index of the National Association of Real Estate Investment Trusts. The index began at 100 in 1972. It closed last month, after 13 full years, at an all-time high of 107.06. Not much of a gain, you say? Yes and no.

The index began declining the year after its inception until it hit the 40-range in 1974 and 1975. The index took until January 1983 to climb back to 90 and spent most of 1984 hovering near 100. A 1984 breakdown shows that 45 equity REITs, like Federal Realty, were up 10.5 percent over 1983, but 18 mortgage REITs, which are interest-rate sensitive, were down 5 percent.

Federal Realty grew -- especially in recent years -- because it found a special niche for itself. The firm buys run-down shopping centers and spruces them up, after first devising a merchandising concept for each.

The Wildwood Shopping Center in Bethesda, for instance, will become a shopping center for the BMW set with jewelry stores and gourmet foods in a colonial-like setting. Another, the Mid-Pike Plaza in Rockville, has become an "off-price" area, with emphasis on discount stores.

In redeveloping a shopping area, Guttman's firm has to make decisions about existing tenants. Some will stay if they fit the image, attract enough customer traffic, do enough business and can pay higher rents. Others are asked to leave if they fail to meet these tests.

When the businesses that leave have been fixtures in the community, it produces more than a little agony for the tenants, the redeveloper and the customers. "We try to keep as many people as we can," said Guttman, acknowledging that sentiment sometimes takes a back seat to business. WW hen Guttman renovates a shopping center, he also W seeks to enhance its value. A case in point is the Tysons Station shopping center in Fairfax County. It was bought by Federal Realty in 1980 for $1.1 million. The firm spent $850,000 on renovations and replaced every tenant.

"We look for situations where there are short-term leases, where there is a strong location and where, if we physically upgrade the center, we will then be able to do two things: number one, attract much better tenants than are there currently and, two, generate much higher rents."

On its $2 million investment in Tysons Station, he said, Federal Realty earned $550,000 last year for a yield of almost 28 percent. The center's current market value, he said, is between $6 million and $7 million.

Current projects include a $1.5 million renovation of Loehmann's Plaza in Falls Church, along with its two office towers. Work also is planned on the adjoining West Falls and Falls Plaza centers in Falls Church. Federal Realty also has projects in the Philadelphia and Richmond areas and several other parts of the country.

Between 1979 and 1983, Federal Realty's net cash flow from operations increased from $1.9 million to $8 million. The 1984 figures will show another increase. Dividends per share over the same period rose from 68.5 cents a year to $1.12 a year, and 1984 dividends are expected to total $1.34.

Federal Realty consistently has raised money by selling stock and now has 7.2 million shares outstanding. Guttman figures that, based on dividends paid, the initial cost of raising money this way is about 8 percent. Once invested, the money has worked hard for the firm.

"On our investments, we have done just unbelievably well," said Guttman. "Since 1980, we have purchased 10 properties. We have invested a total of about $12 million equity. And on that $12 million, we had a return last year of 32 percent." That pace may be hard to maintain, Guttman adds.

Federal Realty stock has nearly tripled in the last five years. During this period, the stock sold as low as $7.38 and as high, just recently, as $21.50. Friday's closing price was $21.25.

In recent years, more than 20 institutions have been attracted to Federal Realty as an investment. Chase Manhattan, for instance, owns 7 percent of the stock. A total of 13 percent is held by two Belgian agricultural companies, S. A. Sipef N.V. and Tabacofina N.V. Guttman also is a major shareholder. He owns 60,000 shares, holds options on 20,000 more and after four more years with the company will get another 20,000 shares.

Guttman, who employs a three-person property acquisition team, has discovered there are 15,000 shopping centers in this country that are more than 20 years old. That ought to be enough to keep even an energetic young executive like Guttman busy for a long time to come.