Private money continues to drive M&A trend, at least for now.

The Blackstone Group's $39 billion purchase last week of Equity Office Properties seemed to typify the trend of mergers and acquisitions that has gripped the REIT industry. As has happened with so many other REITs, Equity Office Properties' stock wasn't commensurate with the company's net asset value because its management had shaken investor confidence with a number of questionable decisions.

There was the firm's much publicized acquisition of a large portfolio of properties in Silicon Valley just before the office market there tanked in the wake of the tech bust. It shed billions of dollars in properties in recent years so that it could vacate all the slower performing tertiary markets it had unwisely entered. Even in recent months it was borrowing just to cover its dividend.

Yet in the current real estate market, all of Equity Office's shortcomings merely made it a more attractive candidate for what has become a familiar scenario in the REIT industry.

Valuing simply the real estate and not the shaky management team that comes with it--as a shareholder must when investing in REIT stock--private real estate investors have been able to swoop in and use high leverage to acquire REITs at premiums well above their share price.

The method has been hailed as an arbitrage because, somehow, in the fickle sea of the public money arena, investors had lost sight of the underlying value of the real estate they were investing in.

Enter the Blackstone Group. But unlike in the early days of M&A transactions in the industry, when competing real estate investors would merely stand on the sidelines in awe of the lucrativeness of a REIT purchase, investors are no longer complacent to stay idle. This, of course, has become a trend in itself. It seems almost a given now that, after a REIT acquisition has seemingly been consummated between the buyer and seller, a competing buyer steps in at the 11th hour with a higher offer.

Sam Zell, the founder of Equity Office Properties, for all his missteps guiding the company, utilized this scenario to great profit after Vornado, which had long considered buying Equity Office Properties itself, entered the fray. The Blackstone Group still won the bid, but it had to pay $3 billion more than its original offer, a price that real estate experts throughout the industry had been calling a steal.

So now that the undervaluation has been well exposed, and buyers are more willing to compete with one another for assets by ratcheting up their bids, will the arbitrage that has driven the frantic pace of M&A transactions continue into 2007?

Experts say probably, but they undoubtedly won't be as lucrative. Consider Blackstone's purchase. The firm seems to be unloading piecemeal nearly the entire Equity Office portfolio overnight. While that was undoubtedly its plan from the outset, it is something that the firm also has to do, experts say, because of the level of debt it has assumed and the price that it paid.

High leverage has been one of the ways that private investors have used to buy buildings away from REITs.

But with real estate pricing at an all time high, tight cap rates have also forced big borrowers into a position of negative cash flow. To rebound from this situation, investors have to extend the time frame in which they will receive their return. They are banking on the continuation of increasing rental rates and real estate values and moderate interest rates. Lending experts say there was another time when the industry was this highly leveraged. 1989.