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NEW YORK CITY-Private equity has returned to the market, but life support efforts—government and otherwise—are stifling deals and stymieing a quick recovery. This was the general sentiment at [email protected]’s second annual real estate forum, entitled “The Road to Recovery: Investing in the Global Real Estate Rebound.”

In the opening keynote interview, Starwood Capital Group’s Barry S. Sternlicht set the tone of the day, expressing his discontent with the artificial stabilization of the market. “The US will lag in recovery because we don’t have the leadership, nor the jobs to bring about a recovery,” he said.

Government initiatives, like TARP, are futile, he added, because they aren’t truly addressing the dislocation in the market. If anything, these programs are protracting the pain, allowing deluded owners and banks to hold on to their underwater assets.

Both the Federal Reserve and the Federal Accounting Standards Board, Sternlicht said, are further exacerbating the problem, keeping interest rates artificially low and relaxing write down rules, respectively. “FASB recently said that if the appraisal of a loan is below the value, the debt doesn’t have to be written down. That worries me,” Sternlicht said.

The investor questioned what the economic landscape would look like once the government safety nets are removed. “As the stimulus package wears off, there will be a further slow down, maybe a W-shaped recovery.”

Still, Sternlicht stressed that the market is re-equitizing, but there’s limited supply of quality product and a host of buyers on the hunt. Private equity players are hovering around, but current yields on investment remains low, he said.

But that’s not stopping the hotel baron from making moves on the market. Sternlicht, who back in October led the consortium that picked up a 40% stake in Corus Bank’s assets, has several active dedicated funds. “It’s fun again to invest.” That is if you have the money, and Sternlicht certainly does. His $1-billion opportunity fund is taking a loan-to-own approach, while his $1-billion REIT is employing what he called a loan-to-loan strategy, aiming to trade debt.

Indeed, a number of panelists shared a predilection for both investment strategies—most notably real estate legend Sam Zell. “The debt markets provide optimum opportunity at this time,” he told economist Peter Linneman, during an afternoon one-on-one session.

“Over the next 24 months, everything that is currently held will be released at 20% to 25% lower than the original asking rate,” Zell said. “At the debt levels out there now, nobody can afford to sell at true value.”

The industry-proclaimed grave dancer, who made a killing during the past couple of downturns, observed that this time around the deals just aren’t there, yet.

“As long as loans are kept current, no one will foreclose. And if banks don’t foreclose, owners are not necessarily going to provide a deed-in-lieu,” Zell said. “But as the banking system gets healthy, it’s tolerance for out of sync loans will diminish accordingly.”

Both Zell and Sternlicht agreed that the global markets offer some sound investment opportunities, particularly Brazil. The South American locale, Zell pointed out, has a strong professional class and an inviting business model.

The headliners also agreed that 2010 would not usher in a recovery. “All income-producing properties are going to have a hard 2010,” Sternlicht said. “But 2011 and 2012 may look better.”

Danielle Douglas is managing editor of Real Estate Forum and editor of Distressed Assets Investor.

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