Investors anticipate that near-term defaults, combined with looming due dates on commercial mortgage-backed securities (CMBS) maturities, will jump-start distressed buying opportunities during the next year, according to the 2009 third-quarter findings of PricewaterhouseCoopers' Korpacz Real Estate Investor 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,’ says Susan Smith, director, real estate advisory practice, PricewaterhouseCoopers, and editor-in-chief of the survey. ‘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.’
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, PricewaterhouseCoopers suggests. Smith says banks appear to be playing a "timing game," trying to refill their capital reserves in an anticipation of bolstered 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,’ she says.
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 are 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. The industry's current challenges are also keeping some investors focused on asset management and value preservation rather than on new acquisitions.
The PricewaterhouseCoopers survey finds that the majority of the commercial real estate industry is expected to remain in recession through 2011. While an industry-wide recovery is not expected to begin until 2012, the pace of the recovery will vary for each property sector, as well as across individual geographies.
In the industrial and office sectors, a more pronounced recovery is expected to materialize in 2011, but it is not expected to dominate these sectors until 2012. In the retail sector, the recession phase of the cycle is expected to linger through 2011, giving way to a slight recovery in 2012. In contrast, the U.S. multifamily sector is expected to lead the industry out of the recession as its recovery starts to take hold in 2010 and continues through 2012.