Back when new development was proceeding at a fever pitch, entrepreneurial investors snatched up land parcels in areas poised for future growth. With land values increasing sharply in a matter of months, investors steeped in this practice — called land banking — could turn a tidy profit when developers came knocking.

Lured by high returns, both private firms and public REITs jumped on this strategy. In the nine months since December 2006, for example, the value of General Growth Properties' land holdings increased more than 11 percent, to $3.29 billion. At the beginning of 2007, the REIT owned 16,516 saleable acres of land. And, Inland Real Estate Development grew its land portfolio by more than 17 percent, to 4,000 acres valued at $250 million.

For a time, that strategy worked. As recently as 2006, the median price for parcels zoned for commercial use rose 7 percent to $170,940 per acre compared to mid-year 2005, according to Chicago-based brokerage firm Grubb & Ellis.

But things have changed. The pace of home construction has dropped to 1.2 million units, the lowest level in 14 years. Developers on commercial projects are stepping back as well. And prices on land parcels have plummeted almost 60 percent from where they were two years ago, notes Steve Lehr, managing director for land services with brokerage firm CB Richard Ellis.

That led to several significant write-downs on land holdings in the fourth quarter of 2007. On December 7, Simon Property Group announced a $26 million non-cash impairment charge related to the write-down of the entire value of its equity in a Phoenix-based master-planned community.

And on December 1, General Growth officials announced a $77 million write-down on land intended for two master-planned communities in Maryland.

“You have a group of people who got into the land business during the up cycle and they don't have patient money and, in some cases, their lenders are making them eager to sell,” says Matt Fiascone, senior vice president of Inland Real Estate Development, a subsidiary of the Oakbrook, Ill.-based Inland Real Estate Group of Cos. Fiascone predicts the market has yet to bottom out. In the first quarter of 2008, he anticipates a lot of bankruptcy sales.

As a result, investors who borrowed cash to buy land face an unpleasant conundrum. The pace of development is dropping and land prices are going down. But to avoid defaulting on loans some are being forced to sell anyway and others may have to hold on to their parcels several years longer than expected, says Rich Walter, president of Irvine, Calif.-based retail brokerage firm Faris Lee Investments. That could become a problem for those holding over-leveraged parcels. For seasoned land bankers, however, this can be a time of opportunity. Inland Real Estate Development, for example, plans to establish new funds.

“We share the opinion that values are going to be flat or declining, and that's the time to buy,” says Fiascone. “The time to buy is when everybody else is selling.”