U.S. commercial real estate investors may turn to other opportunities as vacancies remain high and interest rates rise, according to Barry Sternlicht, chief executive officer of Starwood Capital Group LLC.

"There are a lot of tourists in property and REITs right now," Sternlicht said in a panel discussion Monday at the Milken Institute Global Conference in Beverly Hills, Calif. "Everybody is racing for yield."

If interest rates head higher, "you will see a pause that will take a lot of capital out," he said. Corporate bonds may benefit, according to Sternlicht.

A rebound in the real estate market is being hampered by weak demand and commercial-mortgage-backed financing that declined 95% last year from its record level in 2007.

Vacancies in the first quarter rose to their highest level since at least 2000 in the nation's biggest malls and climbed to a 16-year peak at office buildings, the research firm Reis Inc. said this month.

U.S. commercial real estate values fell in February to 42% below the market top in October 2007, according to the Moody's/REAL Commercial Property Price Index. Almost one-third of repeat sales transactions were of distressed properties, compared with less than 20% in early 2009, Moody's said.

The Federal Reserve said this month that the economy expanded "somewhat" across most of the U.S. in March as consumer spending and manufacturing improved, signaling that the recovery is broadening without gaining much speed.

Fed Chairman Ben S. Bernanke and his colleagues have been debating how and when to tighten credit, including whether to modify a pledge to keep interest rates low for an "extended period."

Deal volume may rise in 2011 when distressed buildings that have been surrendered by owners to special servicers reach the market, Michael Van Konynenburg, president of the commercial brokerage Eastdil Secured LLC in Los Angeles, a unit of Wells Fargo & Co., said during the panel discussion.

Clearing the inventory of foreclosed properties will result in "a lot more" financing through the issuance of commercial mortgage-backed securities, Van Konynenburg said.

Cheap debt fueled the commercial property surge with a record $237 billion of CMBS sales in 2007, according to JPMorgan Chase & Co. Such sales fell last year to $12.2 billion.

The expected discounts for distressed buildings have not materialized as investors holding "mountains of cash" compete for those deals, said Sternlicht, whose firm is based in Greenwich, Conn.

"We were all joking that the distressed cycle lasted about two months," he said. Any discounts for commercial real estate in distress have probably come and gone, he added.

"I'm not sure that we're going to see great opportunities," said panelist Richard LeFrak, the CEO of LeFrak Organization Inc., a New York real estate developer and investor. "I'm sorry, but I missed the whole thing. It's like we blinked, and it went away."

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