When the financing and real estate markets decoupled in 2008, many investors looked at the final years of the last real estate crash in 1990-1992 for answers. Those were the days when the RTC dumped assets en masse, then investors came in and eventually made fortunes. Many were not even experienced in real estate but had liquidity and were able to buy distressed assets for as low as 10 cents on the dollar. This time around, a myriad of funds set up promising lofty returns to attract investors, but as the downturn persisted, much to the dismay of fund managers and investors, the lenders haven't dumped assets to any great degree. The waiting game and lack of for-sale product has forced some funds to accept lower returns, while others have been sidelined or shut down.

Today, it's all about capital competing for a limited supply of assets hitting the market. In order to be a successful bidder, many investors are now reaching for assets and even plugging in lease-up assumptions to make the numbers work. For example, when the market downturn initially occurred it was common for an investor to cap in-place income to determine price. In order to compete, many investors are pricing in future upside, resulting in cap-rate compression and higher asset prices.

At conferences and forums that took place in 2008 and 2009, industry insiders spent a lot of time talking about whether CMBS was going to drive values off a cliff through massive liquidations. However, this has yet to happen. For the time being, it can be argued that the CMBS special servicers have done what they were supposed to do. They have methodically worked to resolve problem loans versus foreclosing and dumping empty buildings. They have appointed receivers and have worked to reposition assets prior to selling them. In many cases, we have seen loans sent out to be auctioned off to the highest bidders. Billions in distressed loans have been worked out wherein the special servicer determined that pursuing this course of action offered the best outcome for the trust. In some cases they have been able to sell properties in receivership, subject to their financing, increasing asset values by offering existing financing with a proportionately small down payment from a new buyer. Consequently, special servicers can argue that they haven't cannibalized themselves. Banks have also played into the high number of bidders and participated in short sales and note sales before a property was ever foreclosed on. This trend is expected to continue. Listen to investment-sales brokers speak and they will talk about all the assets that are being held on the banks' books, the large number of CMBS loans in distress ($60+ billion) with more pain to come. The velocity at which these properties hit the market and methods in which the lenders elect to resolve the problems will be the determining factor in how prices hold up.

Another component of this story is the life insurance companies. They were less aggressive in terms of leverage offered during the boom and offered primarily amortizing loans. Consequently, this lending sector has a very low default rate and not much angst over loan maturities.

Despite the rise in asset values from the lows of 2008, many owners who bought or borrowed on an asset during the boom years remain pensive about the long-term outlook for their equity. Some envision a slow crumbling wherein competitive assets are slowly distributed back into the market. The prices are reset, then the asset's new owner is able to reduce his or her rents to attract tenants from neighboring projects. Since leases are for various fixed terms, an immediate overwhelming effect may not be seen right away by the owner (who bought or borrowed during the boom) next door. But eventually, his leases expire and his rates are reset. Tenant rep brokers bring tenants on tours of the market, showing them space for up to 30% less than what the tenant is currently paying. Eventually, the owner has to give in and make a market-rate deal with the tenant or risk losing out to a competitor. When I speak with owners, their concerns extend beyond today, and they are looking as far as three years into the future. They are worried about their leases that roll in 2013 or their eventual loan maturities. They ponder: Will their income hold up? Can they refinance? Their only hope is that we see a recovery in our economy by then that leads to a reduction in the vacancy rates and rise in rents. Unfortunately, the current headlines don't offer much comfort.

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