Such challenges for some investors, however, present prospects for others. With so much liquidity still in the market, particularly from hedge funds and opportunity funds, these bankruptcies and distressed assets present significant investment opportunities for this side of the market.

The need to recapitalize existing projects also seems bound to grow in 2007. Some opportunities for funding sources lie in what have been referred to as "white knight" recapitalizations, in which opportunity funds step up with equity or debt financing to assist developers on projects that require an additional infusion of capital. Whether developers experience minor cost overruns or face a large debt load amid rising interest rates, they will increasingly turn to short-term loans or investments by these funds.

Many economists anticipate that interest rates will remain mostly flat into the first half of this year. And while the world's political instability will continue to color people's views of the U.S. economy, the economy should nonetheless continue to expand.

Sanford S. Herrick is managing director of Hudson Realty Capital LLC, a real estate opportunity-fund manager with approximately $400 million of origination capability. Herrick is a co-founder of SWH Funding Corp. and Realty Holdings of America. E-mail him at sherrick@hudsoncap.com or visit the company's Web site at www.hudsonrealtycapital.com.

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