The biggest dilemma facing equity investors these days is where to put their money. "There continues to be a good deal of capital that has been raised," says S. Lawrence Davis, a principal at New York-based Emmes Group of Cos.

The company's lending arm, Emmes Capital LLC, provides both short-term, high-yield debt and equity financing. "The problem that you'll probably hear from a good number of groups is that opportunities to deploy that capital in the U.S. market are much more difficult to find," says Davis.

After a nine-year economic run, it is becoming increasingly difficult to find properties that generate the type of equity returns - about 20% - that opportunistic investment funds demand. "Things have been fairly well picked over," says Davis.

Another concern among equity investors is that the strong U.S. economy is at or near its peak. They wonder how long that strong economy is going to last. Even the shortest time horizon for real estate equity investments is three to five years.

Street debate "The questions being bandied about are, 'Are we going to be better off in three to five years? Is now the time to sell or buy?' " says Davis.

It appears the answer to that question is "buy." "We're seeing more dollars going to real estate now than in recent years," says Andy Smith, chairman and CEO of Dallas-based L&B Realty Advisors Inc. The firm represents a variety of institutional investors that fund deals ranging from $5 million to upwards of $100 million.

More dollars are flowing to real estate in part because of recent stock market volatility. Uncertainty in the stock market is prompting institutions to question their asset allocation in stocks. L&B Realty Advisors is seeing a shift back to real estate investments among its client base.

L&B Realty Advisors' institutional clients typically work with a 10% real estate allocation, which recently has been funded at 5% or 6%. "Now we're actually seeing institutions getting funding levels closer to that 10%," says Smith. Some popular investments have been apartment and industrial properties due to favorable returns and market stability, he adds.

Next frontier Emmes Capital typically focuses on opportunistic investments, such as transactions where the capital structure is problematic or a building needs to be repositioned. For example, last fall Emmes Capital made a $2.3 million loan to help finance the purchase and redevelopment of a light industrial building in Brooklyn, N.Y., into a residential use. "It's harder to find a vacant building or situation where there is distress because the market is healthy," says Davis.

Consequently, more funds are going abroad to seek out opportunities. Emmes Capital opened an office in Tokyo in late 1998. "Our sense is that market offers greater risk and adjusted opportunities," says Davis. Emmes Capital has invested about $50 million in equity in Japanese real estate.

Emmes Capital targeted Japan because of its large economy. The greater Tokyo market is twice the size of New York, and Japan is showing signs of pulling out of its extended recession. In addition, the yen is a world currency that can be hedged and converted compared with other Asian currencies that are not as readily liquid. "We think there are attractive opportunities there," says Davis.

Equity investors continue to have healthy appetites for acquisitions, but many firms also are taking advantage of top prices to liquidate real estate holdings. "It's a good market to both buy and sell, particularly for private equity investors like us because the REITs are still quiet," says Smith. Those investors that have to buy with debt capital have been less active.

REITs retool But REITs may not remain quiet for long. REITs are tapping alternative sources of capital to come up with equity to fuel their own expansion strategies. The relatively simple way that REITs raised capital back in the early-1990s by issuing stock is not a viable option at the present time due to under-valued REIT stock prices. "What the capital markets are requiring REIT management teams to do is be very creative," says Perry Grueber, vice president of investor relations at Cleveland-based Developers Diversified Realty Corp.

In addition to pursuing joint venture partnerships, REITs have been liquidating non-core assets. For example, DDR recently sold the 144,000 sq. ft. Stone Mountain Shopping Center in Stone Mountain, Ga., to Atlanta-based SK Real Property Associates LLC for $1.8 million. DDR is using the proceeds from this and other sales to finance a stock repurchase program, repay existing debt, and fund equity requirements in ongoing development projects.

In 1999, Emmes Capital made the transition from buyer to seller of real estate assets for the first time. The firm sold two major office buildings in 1999 that included 757 Third Avenue in New York and 300 Park Avenue South. "The prices reflected the current state of the market, and enabled us to lock into substantial profits," says Davis.

Equity players will focus on opportunistic investments overseas. Another option is to warehouse that capital until greater market volatility occurs and new opportunistic buys materialize, notes Davis. "Hopefully we will be able to re-deploy that capital in even higher investments going forward."