Other trends becoming apparent for the year, though, are morepositive. These include growing levels of equity and mezz financingstepping in to fill the void left by the CMBS markets' seizure, andnew buying opportunities that range from distressed loans toemerging markets.

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To avoid stalled development opportunities, or worse,overextendeddevelopers are seeking out preferred equity, mezzfinancing or JV partners, or a combination of the three, says AdamPetriella, senior director of Finance & Investments in Marcus& Millichap's Los Angeles office.

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Supply of such capital is responding to the growing demand, hesays. "There are more sources of equity and mezz financing todayout there, compared to a year ago. Some are banks seeking tocapture new business by lending off of their balance sheets, andsome are non-regulated funds chasing yield that understand realestate."

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These new sources of capital will also be increasingly tappedthis year, he predicts, by CMBS property owners that have largeamounts of equity 'held hostage' to defeasance costs. "Owners willsee preferred equity and mezz financing as a way to take some cashout of their property and buy additional assets," Petriellasays.

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The cash-rich private lender is another new funding source heexpects to see become more prevalent this year. "I have had clientssay to me 'if you know of someone who needs to close fast or ishaving trouble finding hard money, send them to me.' These arepeople that don't want to enter the market directly because theydon't know where it is going so they are willing to be short-termlender."

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Chris Kelly, a managing director with CapitalSource, says thatportfolio lenders will be the dominant source of capital for atleast this year, and possibly into 2009. "We are going to see lifecompanies, banks, and balance-sheet lenders like GE take the reignsfrom securitized lenders." Certainly portfolio lenders have beenactive during the past several months, but Kelly says the shift ismore profound than many realize -- and it will become apparent thisyear.

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2008 will also be the year that new buying opportunities emergefrom the turmoil. Global markets are sure to continue to attractinvestors. Tom Shapiro, president, CIO and founder of GoldenTreeInSite Partners in New York, for example, says that the firm isvery active in Brazil right now, generating unlevered returns inthe mid-20s right now. Historically, the company has maintained aninvestment portfolio divided 80%-20% between national andinternational markets, respectively. He expects that ratio to shiftto 50%-50% for the long term. Short term? It will be 10%-90%,favoring the global markets, Shapiro says.

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On the other end of the spectrum is the now-hot distressed debtmarket. It is well known that several funds have been raisingcapital to buy these loans. Indeed, Capital Source's Kelly saysonce these funds start buying debt, activity could jump-start thecapital markets. "All this money is getting ready to be pumped intothe market. Meanwhile, the investment banks won't be able to holdonto their mispriced debt any longer." The twain shall eventuallymeet, he says, "and that is when we will start to see our way backto some kind of normalcy." Q3 is when it will begin to happen,Kelly predicts.

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