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With all of the focus in the media over the last four or five years on public capital markets, there has been a tendency to ignore the role of private capital. In the middle of 1998, we were all looking forward to a quiet summer not realizing that by August, the capital markets would be in turmoil and by the fall, the landscape for REITs and the Commercial Mortgage Backed Securities or CMBS business would be completely altered. Spreads widened and literally engulfed a whole group of investors who have since disappeared from the scene. Meanwhile, the momentum investors who had bought into the real estate and hospitality industry story departed as returns from internet stocks and technology companies were going through the roof. Clearly it has been hard for hospitality and real estate businesses to compete with the returns available elsewhere. But stepping into the breach it seems has been a variety of private sources of capitalprivate funds, opportunity funds call them what you will, pension funds and even some life insurance companies, all looking to acquire property or take positions in one way or another in the hospitality sector. They are approaching the market a lot differently than the REITs were back in the "old days"just a couple of years ago. They use leverage differently and expect higher returns. For the REITs of yore it wasn't rocket sciencebuying property at say nine percent cap rates and paying dividends out at say five percenta formulae that was hard for others trying to acquire hotel property to compete against. But it wasn't to last and the much vaunted securitization of US real estate took a breather as Wall Street cooled on the industry's fundamentals. As stock prices swooned, portfolios were rationalized and the focus switched to "same store" growth. Over the past year, property cap rates have probably declined some 200 basis points and transaction volumes have declined along with them. In the last half of 1998, the hotel property transaction market was off approximately 70 percent and in the first half of this year it has been more of the same. To read the complete article, click here to download the printable pdf file (56 kb).
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