Smith cites the decline in volume of private equity capital raises in recent years, although Preqin noted in January that US funds have fared better than their European counterparts. "That means people aren't able to raise a lot of new money, and the money they do have has not been effectively invested," he says. "You have to clear the capital out of the system into existing assets before people can talk about appetite for new investment plans and new strategies."

Glenmont's other cofounder, Lawrence Kestin, says he's "hopeful" that there will be more transaction volume this year, driven by lenders disposing of underwater assets. He's seen momentum, though it's in a two-steps-forward-one- step-back pattern: "Every time we've seen momentum building, we see it flatten out," he says. Miost recently, a buildup in volume in the fourth quarter of last year was followed by a relatively quiet first quarter.

Because of the activity seen at the end of last year, Smith says, "A lot of distressed sellers, lenders and financial institutions believed that there's an active market for acquisitions. So they've gotten more aggressive in their pricing."

Further, Smith says that, as the general economy has shown new signs of life, sellers have assumed that the growth will be sustainable. Glenmont and its clients don't necessarily agree, and therefore "we're not willing to pay the prices that the institutions are trying to extract in anticipation of that growth," Smith says. Nicholas Bienstock, co-managing partner at private equity firm Savanna Investment Management LLC, sees pricing differently. "While stabilized assets are selling for high prices today, challenged, difficult assets where money, expertise and time needs to be invested in order to stabilize them are not trading at peak prices," he tells DAI. "In fact, there are some compelling deals in this market, especially if you go in through the debt." He says the firm expects another 12 to 23 months of such opportunities as troubled assets wend their way through the financial system.

The New York City-based Savanna's specialty: "transitional assets that require a lot more work," specifically "zombie buildings" that need to be repositioned and later sold at top dollar, Bienstock says. In April, the firm closed Savanna Real Estate Fund II, LP with approximately $550 million of total equity commitments, nearly 40% more than its original $400-million target.

Similarly, GlobeSt.com reported in March that Washington, DC-based Federal Capital Partners had launched a $500-million equity fund known as FCP Realty Fund II, with commitments of $122.5 million from at least seven investors and a goal of raising another $377.5 million. Earlier, FCP managing partner Alex Marshall told GlobeSt.com that the company was looking closer at second-tier markets in the Mid-Atlantic region, outside of its DC home base.

The climate for such funds may be improving, notwithstanding the challenges they've faced in recent years. The April fund indices from the National Council of Real Estate Investment Fiduciaries and the Townsend Group showed that opportunistic strategies returned 6.4% in the fourth quarter of 2010, helping to bring time-weighted returns for 2010 to 24.3%. That compared to losses of 28.6% in 2009 and 36.8% in 2008.

For playing in the distressed/opportunistic arena, funds may be the way to go, says David Eyzenberg, head of commercial real estate for New York City-based NewOak Capital. "If you're investing in core or core-plus and you're a large institution, you're probably better off buying it yourself," he says. "All you have to do is hire the management company. You don't need to lose yield to a fund. But if you're doing value-add or opportunistic, you need to do that either through a fund or through an operator. The big guys can do that through operators, because they have all that in-house infrastructure. The smaller groups just don't." Even with the competitive advantage that size confers, larger investors may still look to operate through funds. "There are investors who are on the ground right now and really understand the dynamic that is occurring," Kestin says. Then there are those who take the view from 50,000 feet up, "and see it as something where you can buy assets at a 30% to 40% discount to their historical high values. They believe that with real assets and your ability to hedge inflation, it's an awfully attractive bet to be making at this stage of the game." They're willing to let the fund manager make that bet for them, he adds, assuming that the manager has the ability to deploy the capital.

One major source of that capital could be foreign investors. A survey released in February by the Association of Foreign Investors in Real Estate in Chicago found that more than 70% of foreign investor respondents plan to invest more capital in US markets than they did in '10.

Whether or not they'll be looking at the distressed arena is difficult to tell, though. "Historically, you've seen off shore institutions gravitate toward gateway cities and core assets," says Kestin. "They don't have an appetite for distressed investing, because they don't understand the nature of rebranding hotels or re-tenanting office buildings. They perceive the risks as significant, and they'll continue to gravitate toward what they have historically: relatively stable assets. They'll price accordingly. I don't see that changing."

And there are signs that overseas players may be taking a few cautious steps outside their comfort zone of Alist markets. The Toledo Blade newspaper recently reported that a Chinese investor, Simon Guo, had purchased the landmark Docks restaurant complex in that Ohio city. "In the past year we saw one in Milwaukee," Real Capital Analytics' senior market analyst, Ben Thypin, told the newspaper. "What's happening in Toledo is a continuation of that trend. They can buy land and build a lot more for their money as long as they are comfortable with the market."

However, both Thypin and RCA managing director Dan Fasulo told reporters recently that because foreign investors oft en work with REITs and commingled funds, it's difficult to gauge how much direct investment they're doing. And at March's Akerman Senterfitt conference, DeBoer cited a stumbling block for direct investment from overseas, one which may loom larger than lack of market familiarity: laws such as FIRPTA, which place a heavy tax burden on investors from outside the US. "I don't get why we can't adjust policy that will help American business," said DeBoer. "It will only help banks, which are the ones holding these assets."

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