Why distressed CRE will start changing hands in 2010 (WesternREBusiness)

WHY DISTRESSED COMMERCIAL REAL ESTATE WILL START CHANGING HANDS IN 2010

By: John Strockis, executive managing director of Asset Services at Voit Real Estate Services.

January Issue 2010 http://westernrebusiness.com/articles/JAN10/cover2.html

Well-capitalized financial institutions that have portfolios of distressed commercial real estate now have the staffing, time and motivation to start foreclosing on defaulted loans. This will likely lead to more REO properties being sold in 2010. Constraints such as borrower’s inability to bring fresh capital to maturing loans, bankruptcy filings and concerns about commercial real estate valuations all but prevented additional distressed assets hitting the market in 2009.

Paradoxically, Class A REO assets that were brought to market in 2009 often achieved multiple offers and buyers sometimes paid a “scarcity premium” due to the limited supply. Why? There is ample capital looking to acquire distressed real estate. Lenders need to take advantage of this excessive investor capital and bring their assets to market sometime in the first half of 2010. Beyond this timeframe, distressed assets from the FDIC and perhaps from CMBS special servicers could increase the supply.

Clearly banks that can “pretend & extend” and prevent additional cash reserves from being utilized on their distresses loans will continue to do so. However, the belief here is that this “delay & pray” strategy will prove to be nothing but a hope certificate. Rents are not projected to grow until 2012 in most major metro areas; rents cannot grow until the supply of vacant space is absorbed. Space cannot be absorbed until businesses expand. Businesses cannot expand until the overall economy recovers.

Organized and well-capitalized financial institutions will step up their REO activity in 2010 and more commercial real estate will come to market looking for that motivated capital. Sometime in third quarter 2010, more distressed commercial real estate assets will come to market and the current scarcity premiums will diminish.