Despite rapid deterioration of commercial real estate fundamentals, equity investors have been frustrated with the lack of distressed buying opportunities. However, according to the third-quarter PricewaterhouseCoopers' Korpacz Real Estate Investor Survey, investors anticipate near-term defaults combined with looming due dates on commercial mortgage-backed securities (CMBS) maturities to jump-start distressed buying opportunities during the next year.
While some investors are looking to the $153 billion of CMBS loans due in 2012 to spur buying opportunities, commercial banks account for a much greater percentage of the total looming debt and could provide distressed sales sooner than 2012.
“It appears many banks are playing a ‘timing game’ attempting to replenish their capital reserves in anticipation that the economic recovery will bolster property values. This may be a risky proposition given that commercial real estate's performance often lags what happens in the economy and in this game, the banks can ultimately lose,” said Susan Smith, director of the real estate advisory practice for PricewaterhouseCoopers and editor-in-chief of the survey.
So far, the de-leveraging of the commercial real estate industry has disappointed many investors who have been waiting patiently to acquire quality, stable assets at distressed pricing.
“Investors seem surprised at the lack of quality buying opportunities given the problems in the financial markets and the continued weakening of the industry's fundamentals,” said Smith. “Some investors sense that near-term defaults with commercial banks will allow them to acquire quality assets at steep discounts, as banks may no longer be able to continue to ‘pretend and extend’ troubled loans and would be forced to place assets up for sale.”
Surveyed investors believe the massive amount of leverage used to fuel the buying frenzy during the peak of the cycle in 2006-2007 will greatly increase the number of commercial properties for sale primarily due to owners who are unable to cover their debt service obligations and incapable of refinancing.
If such buying opportunities do come to fruition, the next challenge for investors will likely be asset pricing. The report cites that a bid-ask pricing gap still exists across all property sectors and geographies. In addition, the unraveling of the debt markets appears to be keeping offering bids from buyers low.
Information about subscribing to PricewaterhouseCoopers' Korpacz Real Estate Investor Survey can be found at http://www.pwcreval.com/.