Still, even deep-pocketed Blackstone needs to apply "a matrix of concerns" in valuing potential acquisitions, regardless of where they're located, Barry says. These would include such obvious factors as: the real estate itself, the current rent roll and the potential for rent growth. There are also considerations such as the legal/regulatory environment, the job market and how local market fundamentals affect values.

"You're going to be a lot more confident in your Washington, DC office acquisition than you would be in Phoenix," says Barry. He adds, however, that three years after the downturn set in, "most of the rent devaluation has already occurred," whether it takes the form of a hotelier scrambling to attract guests, an office tenant looking to blend-and- extend its lease or a hard-pressed 500-store retailer aggressively negotiating reductions with all its landlords to conserve cash.

On that basis, underwriting needs to be based on current rents as well as projections of growth, Barry says. "But once you establish, for example, that the property is 80% occupied, rents are 70% of the peak and the added income stream for that property is X, you apply the cap rate to that, and the cap rate is not far from what it once was," at least in the case of assets that make "a compelling case" for future growth.

It was just such a belief in future growth that reportedly led a partnership of Blackstone and Square Mile Capital LLC to buy a $385-million package of mortgages tied to 45 hotels from the FDIC. The Wall Street Journal reported in March that the group agreed to pay about 80 cents on the dollar for the portfolio, a relatively high price compared with deals involving distressed hotel debt earlier in the recovery. Additionally, while Square Mile's previous FDIC deal involved 0% financing from the agency, this one provides no such cushioning.

As is the case on any scale of acquisitions, the mega-FDIC buys suggest big players making the best of the hand they've been dealt by the current market. "We sent invitations to a gigantic party and nobody came," Colony chairman Thomas Barrack told Bloomberg Television in January. "The government allowed banks to slowly, and in an orderly way, work out of what we had all anticipated was the $3-trillion tsunami." He added that on the FDIC portfolio acquisitions, "You won't know how you really did until you resolve the last 10% of that portfolio, and that can either be 18 months or 36 months."

Although he believes individual investors may want to look elsewhere, NewOak Capital's David Eyzenberg says it's understandable that big players are making big plays. "Blackstone has a lot of office space and a ton of money they have to put out-they can't sit there and do $15-million or $20-million one-off s," says Eyzenberg, New York City-based head of commercial real estate for NewOak. "They're going to do the huge deals. There's a number of groups out there that are looking to take down these large portfolios."

Yet Eyzenberg says the opportunities can be found "where the institutions aren't looking, in the $15-million-to- $40-million price range. It's going to be too big for the locals and too small for the institutions. Whether you're looking at the asset level or loan level, that's really where the pricing irregularity is going to allow you to get a little extra yield." Specifically, Eyzenberg recommends going for value-added assets. "Here you have to make a bet that we're bottomed out and we're not going to have a double-dip," he says. "You don't necessarily need super high-end trajectory growth," because value-add could entail "just a little bit of repositioning" given a well-located asset and a good operator.

From a capital deployment standpoint, Eyzenberg tells DAI it makes sense to play in the preferred equity and mezzanine-loan space. "For the wellheeled capital sources, especially those with real estate experience, it almost makes sense today to come in through the capital stack rather than buy assets outright because their yield is going to be better," he says. "If they happen to foreclose, they're going to be on a better basis than if they were to pay for it."

That, in a nutshell, is the strategy Greenwich, CT-based Starwood Capital is pursuing with the Viceroy Anguilla Resort and Residences, a 166-unit luxury property in the British West Indies. Barnes Bay Development Ltd. in March filed a Chapter 11 plan at US Bankruptcy Court for the District of Delaware to facilitate the sale of the unfinished property. Starwood Capital, having bought the construction loan last year, now controls the $358-million mortgage on Viceroy Anguilla and expects to acquire the resort as part of the sale and bankruptcy plan, according to Barnes Bay.

If Starwood Capital successfully acquires the property at the auction and the bankruptcy plan is confirmed, the firm says it expects to invest additional millions of dollars into the property later this year. Additionally, Starwood expects to work with the current buyers to close on the contracts that Barnes Bay signed for the sale of condos and villas. The company intends to reduce the purchase price of many Viceroy Anguilla residences to reflect the fact that almost two years have elapsed since the buyers intended to close. "We want to own this property, and we hope those individuals who have deposits with Barnes Bay will choose to close and take advantage of the significant savings we are offering," says a Starwood Capital spokesman.

In another recent lodging-related transaction, this one involving-no surprise here-Blackstone, the debt on the historic Hotel Del Coronado near San Diego was restructured in a deal that culminated in Blackstone taking a 50% stake in the 788-room property, with a concurrent reduction in the stakes of the joint venture partners that previously controlled it, including KSL Resorts, Kohlberg Kravis & Roberts and Strategic Hotels & Resorts. Blackstone provided about $100 million of new capital and converted a slice of less than $20 million of the Del Coronado's mezz debt into equity, the WSJ reported in February.

Both deals illustrate the positive results that can accrue from buying junior debt, yet Eyzenberg also has words of caution. "Given the amount of due diligence, it's even more complicated than buying the building because if you're going to buy the debt, you don't know whether you're going to get the deed," he says. "You're a little bit removed from the asset itself." He adds that the strategy differs "depending on whether you're buying loan-to-own or buying the debt and hoping you're buying it cheap enough that it redeems. That's a whole different level of underwriting than when you're just buying the asset."

Eyzenberg says it's "virtually impossible to underwrite" the large portfolios sought by the industry's biggest players. "I hate to use this analogy, but you're like a drug dealer: you're buying by the ounce and hoping to sell by the gram," he says. "They think the mistakes they make will balance out across the portfolio, which may or may not be the case, but regardless, you're doing it by the pound."

The individual investor, he adds, has to take the opposite approach, "because that's where the one-off opportunities are" and it involves "getting into the granular underwriting of the asset. It works both ways-the lenders and all of their assets will get better pricing from the local guy that understands the specific economics of the asset and the underlying loan." At the same time, the individual investor will have a much better chance of getting the economics he expects.

Moreover, says NewOak CEO Ron Dvari, investors who are buying at "the retail level"-making deals of say, below $100 million-"have the luxury of it being their money, and not having to worry about missing the cycle and not having to say, ‘we raised $5 billion and we put only $1 billion to work.' Everybody sees that the market is going to be higher at the end of 2011 than it was at the end of 2010. If you see that, then you want to be the guy who's going to have that number tied up."

Dvari likens investor behavior at this smaller-scale level to surfing: the surfer trying to catch a wave jumps in as soon as that wave arrives. For players in the $100-million-or-less arena, "liquidity is very important to them," he says. "They say, ‘for the amount of money I need to work, I can change my strategy any day. If office in central business districts doesn't work, I'll do office in tertiary. If that doesn't work, I'll go into multifamily. If multifamily doesn't work, I'll go into business hotels.' " In short, individual investors may have the luxury of turning on a dime. "These are hunters, and hunters normally don't look like an army. They look like a guy with a lot of curiosity and a broken Jeep," Dvari says. But, he adds, "there's room in the market for both" individuals and large-scale JVs.

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