"I'm surprised that the market has jumped on what could possibly be short-term earnings," said Deborah Bailey, director of governance, regulatory and risk strategies at Deloitte. "There were clearly things that were broken and they haven't been fixed yet." Regulators are still devising rules to prevent further systemic failure, but that process has been sluggish.

Jason New, senior managing director and co-head of distressed investing for GSO Capital Partners and the Blackstone Group, suggested that the stimulus-driven recovery is masking the risks still present in the market.

But Bailey said she shudders to think what would have happened without government sponsored actions. Stopgap measures, such as TARP and TALF, certainly halted further hemorrhaging of the market, said Bailey. The capital purchase program, for instance, provided floundering banks a lifeline during the desperate days of the crash.

However, the purchase of legacy assets through PPIP, she noted, has been far less successful and cumbersome as investors slowly wind through the bureaucratic process. The difficulty of determining pricing has largely hamstrung efforts to siphon off troubled assets.

Still, the FDIC is managing to clear its stock of repossessed holdings through foreclosure auctions, which are anticipated to ramp up in the coming year. In some respects, the agency, the prime market clearing mechanism, has become an RTC-like institution for smaller banks, observed David Ying, senior managing director of corporate advisory business and co-head of the restructuring practice at Evercore Partners.

For the larger institutions, the motivation to sell just isn't there. Precipitous value declines--down some 40% from 2007 peak levels--would translate into substantial discounts and losses on assets brought to market. However, sales activity in the past six months eclipsed the transaction volume of the prior 18 months. If this trend continues, the market will likely see an influx of deals.

But some market observers remain leery of the continued poor performance of commercial real estate. Occupancy and rental rate growth is all but nonexistent across all property types. Randy Reiff, founder of Spartan Real Estate Capital LLC pointed out that relative value has improved and people are feeding into that excitement without necessarily acknowledging the poor performance of asset classes.

"The question with commercial real estate is: 'Are people continuing to watch fundamentals or are they being blinded by the technical effect," Reiff said. "The market traded off 30 to 40 points a year ago and everyone was saying the market rallied back. But fundamentals never came back."

Instant Insights /

Blindsided By Hope: Investors Need to Watch Poor Fundamentals

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