How Long Until We See A Steady Stream of Distressed Real Estate Assets For Sale and How Hammered Will Non-Distressed Properties Get?

It seems to me like we are still in the same market rut we have been in for several months now.  Don’t get me wrong, we are still doing deals and moving transactions forward but they are all one-off deals and there is really no uniform theme to any of the deals.  When I look at the market from a few steps back from my daily involvement, I don’t see any increase in transaction velocity where I believe I should be seeing it – in distressed asset sales.  Most people I speak with echo my sentiments.  Sure there are a handful of note and foreclosure sales happening in the commercial market (we are working on a few of each right now) but government intervention (or the hope for future government intervention) has essentially halted the commercial real estate market from finding its natural point of equilibrium.  Lenders are reluctant to sell notes at deep discounts and have been very willing to restructure and extend loans as opposed to foreclosing.  I think they have a clear picture of the buy side of the equation right now.  Lenders may be willing to take $0.60 – $0.70 on the dollar to get out but the buy side of the market (at least according to what I am seeing and hearing) is willing to pay more in the range of $0.20 – $0.30 on the dollar.  The reason: market uncertainty.  Rents can continue to drop, occupancy can continue to drop and capitalization rates can continue to rise.  30% – 40% discounts are not enough to compensate for the risk inherent in this environment It is pretty clear that governmental backstopping could mean huge savings for the banks.

Why do you think you hear so many stories about money sitting on the sidelines and people saying “we’re keeping our powder dry”?  The majority of investors are not willing to buy right now, even though values are significantly reduced from levels of a couple of years ago.  It is pretty clear that conventional wisdom is that market fundamentals will get worse before they get better.

Most people I talk to believe that significant REO volume of commercial investment properties will not appear in the market for another 8 – 12 months.  What this means to me is this: if you own a property that is not “distressed” and have any designs on selling anytime soon, do it now.  You don’t want to be the guy with the strip center at $400 PSF when the majority of the properties in the market are distressed and selling for $125 PSF.  I don’t care how good your property is, how well located it is, how strong your tenants are or about any other selling point you can come up with.  Nobody is going to pay 2, 3 or 4 times the cost of the market average for your property.  I shake my head every day at some of the listings sent my way.  Telling a seller you can get him a 6.25% CAP for a Starbucks, etc., etc. strip center with $3.00 rents is complete nonsense.  If a seller believes you, shame on him when he should be listening to the guy telling him he needs to be on the market at a 7.50% CAP.  If you really want to sell, take a look at your 2 or 3 best comps on the market and add 25 – 50 basis points to your offering CAP Rate and get going quick.  Not every property on the market will make it to escrow.  Pricing too aggressively is a sure way to guarantee that yours will not be one of them.


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