The New World Of Real Estate

It almost seems as if much of the $3 trillion in commercial real estate in the U.S. is up for grabs. On Sept. 9, Starwood Lodging Trust, which owns more than 100 hotels, won the battle for Westin Hotels & Resorts with a bid of $1.6 billion in cash, securities, and debt, creating a hotel empire with more than $4 billion in annual revenue. A few days earlier, Equity Residential Properties Trust, the country's largest apartment owner, snapped up Evans Withycombe Residential Inc. for $1.1 billion in securities and debt. And Simon DeBartolo Group Inc., the nation's largest regional mall operator, has placed a $1 billion bid on the table to acquire Retail Property Trust, which owns a choice portfolio of malls.

To some--including badly burned investors--the buoyant activity appears reminiscent of the painful commercial real estate debacles of the mid-1970s and early 1990s. As those episodes demonstrate, commercial real estate is prey to boom and bust cycles, largely due to long-term construction commitments. Overbuilding, overleveraging, and overreaching have regularly produced waves of bankruptcies and billions in losses.