Bob O'Brien, the recently appointed real estate services leader at Deloitte, tells GlobeSt.com the nascent economic recovery has created "a sense of optimism, or at least less pessimism." He notes that job losses appear to have stabilized, "and employment numbers are ticking up slowly. Consumer spending seems to have bottomed out and ticked up a little bit; retailers and retail real estate owners were reasonably happy with holiday sales. It's going to come back slowly, but it's not in free-fall as it was the previous 12 months."

Within commercial real estate, the capital markets "have opened up to some extent, certainly much improved from where they were a year ago," O'Brien says. Meanwhile, he adds, REITs have been actively raising funds.

A major obstacle in any real estate recovery is the issue of maturing loans. "You can't go out and get those things refinanced very easily," says O'Brien, based in Chicago. "But there seems to have been a path developed around extending the loans with the existing lenders."

While the extensions seen six to nine months ago tended to be short-term—90 days at the most, just to buy the borrower some negotiating time—"today, you see more extensions of two, three, five, seven years," O'Brien says. "Some call it pretend-and-extend, but given the low interest rates, it's really helping both the banks and the real estate owners navigate what's been a very difficult period."

The flip side of that lender forbearance has been a dearth of buying opportunities, despite investors' best efforts to build a war chest. O'Brien notes that amid a gradual process of price discovery, "there still hasn't been enough transaction volume to say where the prices are." Nor has the mounting tally of distressed assets brought many properties to market.

"One of the interesting things we've seen is that the process for taking over an asset, for the borrower to hand it back to the lender, has really taken a long time to develop," says O'Brien. "In part, it's because the lender doesn't want the asset back and gives the borrower a lot of latitude." He adds that the "increased professionalism" of real estate managers today, compared to the downturn of the 1990s, helps build a level of trust between lenders and borrowers.

"But even in situations where the borrower just wants to get rid of the asset, we've seen lenders in effect slowing that process down," O'Brien says. "So a lot of assets that you would've thought would have gone back early last year are just going back now." He adds that Deloitte anticipates "more distressed activity in 2010 and a lot more in 2011."

For now, though, lenders confronted with distressed assets may be biding their time. "If you go back to the days of the RTC, you had properties and loans selling for pennies on the dollar," O'Brien says. "The investors who bought them generally did very well. The players today don't want to repeat that mistake. They don't want to be the ones selling at the bottom." Particularly as economic indicators begin looking up somewhat, "there may be value in holding these properties and loans to recapture some of the value over time."

Instant Insights /

A Market Bottom Is in Sight for 2010

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