It is not just CMBS that is luring away investors from activedevelopment. Bob Dougherty, a principal with Buchanan StreetPartners, tells GlobeSt.com that the company is interested inbuying whole loans at discounts, B pieces of existing loans andbuying -- as well as originating -- mezz loans. "That is where wesee tremendous opportunities," he says. "We see returns starting at15% and going to 20% on an IRR (internal rate of return)basis."

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He compares those numbers to JV equity deals – arguably thefinancial lifeblood of real estate development -- which have a 150basis point to 200 basis point higher spread, but with a lot moreattendant risk. "We think risk-return ratio tilts significantly infavor of buying and investing in the illiquid loan space,"Dougherty says.

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Life insurers – a key capital source now that CMBS has dried up– also show signs of abandoning equity transactions. Todd Everett,managing director and head of Real Estate Fixed Income forPrincipal Real Estate Investors, told GlobeSt.com in an earlierinterview that the company is putting more investable cash flowinto CMBS because it sees a good relative value. "We are findingproducts on the secondary markets that are available at yields thatare very attractive. This year, for instance, we can acquire AACMBS and junior AAA tranches at yields in excess of 9%."(http://www.globest.com/news/1090_1090/hotseat/168354-1.html).

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The prospect of less capital compared to what is available todayis, clearly, a disturbing development. Companies that need tofollow this trend most closely, say Dougherty and others, are thosefirms that are thinking about refinancing.

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The choice is not pretty. A firm can refinance now – at higherrates. Or, it can wait for the second half of the year, when ratesare likely to be lower, thanks to the incredibly fiscal andmonetary stimulus packages that have been put together – but risknot being able to find a borrower because all of the availablecapital has been invested in the loan markets. "Frankly, we aretelling our clients to grab the best deal that comes along rightnow," O'Malley said.

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Certainly, not every industry watcher thinks this is how thesecond half of the year will unfold. Bruce Baschuk, president andfounding partner at J Street Development, correctly observed atRealShare that new equity sources are entering the market everyday. "More equity is being dedicated to the real estate marketsnow, much of it still on the sidelines, waiting for the markets tosettle."

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