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This spring, before the credit market imploded, Tishman Speyer Properties announced a $22 billion deal with Lehman Brothers to buy Archstone-Smith Trust, which owns apartment buildings across the country, including in California and Washington, DC. Overall, real estate deals were closing at a record clip; and real estate lawyers, particularly those who specialize in real estate investment trusts, or REITs, were reaping an unprecedented windfall.

Then came the credit crunch, and rumors were rampant that Lehman was having problems closing the Archstone deal. In an already-sticky Washington summer, things got even stickier inside three local firms–DLA Piper, Hogan & Hartson, and Venable–where lawyers who worked on the transaction waited to see if the second-largest REIT deal in history would collapse. When the deal finally closed, on Oct. 5, it was a great win for the three DC firms. And the way things look at the moment, they may have a long time to savor it.

“People like to say that is the last big deal for a while,” says Prentiss Feagles, co-director of Hogan & Hartson’s tax practice group. They’re right. Deal flow numbers tanked in the third quarter, after two quarters that could not have been hotter.

“It’s a liquidity crisis caused by fear,” says Steven Marks, managing director of credit rating agency Fitch Ratings. “Because providers of debt are having trouble selling or securitizing loans, they’re not as willing to originate loans.”

That, in turn, has forced real estate practices at area firms to shift their focus away from large deals to areas such as corporate governance, restructuring, and initial public offerings (which aren’t themselves exactly hot right now).

For Hogan, real estate M&A deals account for a little less than half of the revenue from its real estate practice group. Lawyers at the firm maintain that the group is still billing enough hours for its earnings to match last year’s haul of somewhere north of $60 million.

Much of the same can be said of DLA and Venable. Though the year started off at a record pace, Venable’s James Hanks Jr. says: “We’ve seen a slowdown in M&A work and in equity offerings in the REIT space. This summer we had a couple of deals that died, and a couple more were wounded.”

Punching Above Their Weight

The rapid ascent–and sudden descent–of REIT deals has caused many lawyers to break out the Dramamine. According to Dealogic Ltd., which compiles research and investing information, the volume of REIT M&A deals in 2006 doubled, and their value tripled. That trend only intensified in the early months of 2007, when several huge REIT deals grabbed headlines and boosted partner profits at area firms. Those deals included the Blackstone Group’s $39-billion acquisition of Chicago-based REIT Equity Office Properties Trust. Venable, led by real estate partner Hanks working as Maryland counsel, represented Equity Office Properties on the deal; Sidley Austin was lead counsel for the trust, while Simpson Thacher & Bartlett represented Blackstone.

According to Dealogic, in the second quarter of 2007 there were 27 REIT deals announced, a number far outpacing the previous high of 20 in the final quarter of 2006. In the first half of 2007, announced U.S. deals totaled nearly $75 billion. But in the third quarter there were only 11 announced transactions, with a value of only $3 billion.

“Where the credit crunch has impacted REIT work is where private-equity-financed deals have occurred,” says Jay Bernstein, a REIT partner in Clifford Chance’s New York office. “There was a ton of those deals, and they have gone away.”

Which isn’t good news for Washington firms with a substantial grounding in the real estate practice. Among DC-area firms, Hogan, Venable, DLA, and Richmond-based Hunton & Williams all punch above their corporate weight class when it comes to real estate deals. According to The American Lawyer’s Corporate Scorecard, the firms routinely appear in the top 10 in REIT transactions, rivaling larger, more profitable firms such as Skadden, Arps, Slate, Meagher & Flom and Latham & Watkins for REIT work; largely because more than half of all U.S. real estate investment trusts are formed in Maryland, where laws are friendly.

Numbers from Thomson Financial show that Venable worked for issuers on 40 REIT offerings last year. Proceeds on those deals totaled more than $5 billion. Through three quarters this year, Venable has worked on the issuer side of 14 deals. Those proceeds have totaled roughly $2.4 billion. DLA has worked on 11 REIT deals in 2007, totaling $1.8 billion.

And the Survey Says . . .

Despite the recent slowdown, Ronald Kuykendall, vice president of communications with the National Association of Real Estate Investment Trusts, says the time has not yet come to panic on real estate. The REIT market, he says, has not ground to a complete halt as it did in the late 1980s following the junk bond meltdown and years of overdevelopment. Kuykendall says public REITs are faring better than private REITs, as stocks are doing better than private transactions.

“Transaction activity has cooled down, but we’re still seeing institutional money moving into REITs,” Kuykendall says. “It’s all about waiting this out.” How long a wait depends on who is answering the question.

“Real estate M&A is 20% of what it was earlier this year,” says Gilbert Menna, chairman of Goodwin Procter’s real estate group in Boston. “I hope to God we don’t end up in a recession, because then this could really spin downward.”

Mergers and acquisitions work on behalf of REITs has been a major cash cow for firms in recent years. Since 2006, eight of the 10 largest real estate transactions involved REITs as either the target or the acquirer. And five of those deals involved private equity firms as the buyer.

“While there may not be as many very large private M&A transactions next year, there likely will be continuing M&A activity, which will produce good revenue for law firms,” says J. Warren Gorrell Jr., chairman of Hogan & Hartson. “Given our current pace, we expect to continue to have a strong performance in 2008.” Gorrell says the slack in closing large REIT M&A deals can also be made up in joint venture transactions, restructuring, and IPO work.

Others aren’t so optimistic. “Deal flow is off,” says Francis Burch Jr., joint CEO of DLA Piper. “We haven’t seen the fur hit the fan yet, and history suggests we’re overdue for it.”

As a sign of the times, DLA Piper released a real estate survey last month finding that 68 percent of the more than 300 clients who responded have a bearish outlook, with 61 percent saying it will take nine to 12 months for the real estate market to rebound. Only six months earlier, a similar survey found that clients were bullish, with 90 percent expecting the public-to-private real estate M&A trend to continue to go up at a fast clip.

“Most people will say, and be correct, that 2007 will turn out to be a very good year,” says Jay Epstien, head of DLA Piper’s U.S. real estate practice, which has more than 250 lawyers. “But I can look out over the horizon and see that people aren’t going to be busy soon. The challenge will be how we deploy those people next year.”

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