The study found that 53% of respondents to an E&Y survey have purchased distressed or nonperforming loans in the last 18 months. However, 45% of those who have not yet pulled the trigger believe it's too early in the game to even attempt to purchase nonperforming loans at the moment.

One reason is the slow rate at which distressed assets are coming onto the market. Distressed situations are "piling up faster than they're being resolved," says Seyfarth, E&Y's San Francisco-based national director of nonperforming loans. He adds, "The broad view is that commercial real estate assets are getting worse, not better, and that's going to impact financial institutions. The issue is that the price expectations are different between the two players, and in some cases significantly different."

That gap will only be narrowed by sellers coming down on the ask side, rather than buyers changing their pricing calculations, says Seyfarth. "I think we'll reach equilibrium quarter by quarter, as banks continue to increase their reserve levels and drop their book values."

In the meantime, banks have held assets back from the market in the belief that they couldn't afford to sell for what buyers are willing to pay, in many cases preferring to go the workout route. That may be changing soon: "Workouts are costly and time-consuming, and they're not really what banks are set up to do," Seyfarth says.

Commercial whole loans are the preferred investment vehicle for 45% of respondents, more than twice as many as those who preferred either residential and land loans. Seyfarth says he doesn't expect that to change over the next 12 months.

If investors aren't willing to pay higher prices, neither are they setting their expectations as high when it comes to returns. "Only 35% of those investors polled claim to have return requirements above 20% and an equal number actually are shooting for returns in the 10% to 15% range," Seyfarth says in a release. He adds that once the wave of distressed opportunities comes crashing in, the market could deepen and grow competitive quite quickly.

Instant Insights /

E&Y: 'One-Off Deals' Dominate Distress

Related Stories

Recommended For You