A crash in property values may have wiped out $1 trillion of commercial real estate equity and opened up a gaping need for capital, but opportunities for new investors are scarce as the downturn plays out in slow motion, according to KBW Inc.'s Keefe, Bruyette & Woods Inc.

Four real estate investment trusts hoping to take advantage of turmoil in commercial real estate have done initial public offerings this year. In a report last week, KBW analysts initiated coverage on two of them — CreXus Investment Corp. and Colony Financial Inc. — with "market perform" ratings.

Analysts Bose George and Jade Rahmani wrote that returns on commercial real estate investments are likely to be moderate because a large amount of capital now stands ready to be deployed despite reluctance by banks to sell assets and the slow pace of Federal Deposit Insurance Corp. auctions. Moreover, funding offered by the government through programs like the Term Asset-Backed Securities Loan Facility has compressed spreads.

Maturing debt is likely to be "the primary story in the commercial mortgage market over the next few years," the analysts wrote. But among borrowers from banks, whose debt is coming due more quickly than in securitizations because of shorter loan terms, "the need for capital will be offset by borrowers' being forced to refinance with existing banks because of the lack of equity at both the bank" and the borrower.

"The recapitalization of the sector could take time," the analysts wrote.

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