It’s been tough out there for acquisitions officers and real estate brokerage firms but the signs are that transaction volume is headed up, paving the way for some new “real estate empires” to be built in 2003. Blackstone Partners and Metlife Real Estate, both reportedly offering $2 billion-plus U.S. portfolios for sale, are not likely to be the last major sellers in this cycle. Even some of the most active buyers of the last 12 months, investment managers like Shorenstein Company and CBRE Investors, have been selling assets in more stable markets such as Chicago and Miami. Meanwhile, the relaxation of foreign investment rules in Germany this summer quickly led to a ramping up of investor interest in U.S. real estate that shows little sign of diminishing in 2003. With sellers bringing more product to the market, there’s no shortage of buyers. The 2002 Ernst & Young survey of opportunistic investing identified close to $20 billion of equity in the hands of U.S. real estate private equity funds last year, amounting to $90 billion of capital looking to invest in commercial real estate globally. Watch for Ernst & Young’s 2003 survey (due out this Spring) to see if there’s any let-up in the pace of this equity raise. But accounting rule changes are even looming over the private equity market. As currently drafted, the scope clarification currently in exposure on AICPA’s Investment Company Audit Guide, could have significant implications as to what GAAP is for a real estate fund, and could even prohibit fair value accounting, a serious blow to opportunity funds.Adding to overall liquidity in real estate this year has been flight capital from the volatile stock market. Individual investors reason that real estate is less volatile and thus a safe harbor for retirement dollars. This may prompt an additional surge of capital in 2003 into REITs and real estate mutual funds but individual investors should be cautious about direct investment in bricks and mortar. While real estate has little correlation to the stock market, suggesting that it is a good hedge against volatile equities, even experienced direct investors can get their fingers burned.Institutional investors will have to get used to lower returns from real estate. Look for more pension funds, endowments and other institutional players to drop expected rates of return from nine to seven percent, pushing more investors towards lower expectation real estate deals and, perhaps, high yield bonds.This information was supplied by Ernst & Young (www.ey.com) and excerpted from the companies’ Annual State of the Real Estate, Hospitality, and Construction Industries 2003 Report.