Five years after the start of an unprecedented housing market decline and four years since the collapse of Bear Stearns, Lehman and the credit markets, the commercial real estate debt markets only sluggishly arose from their extended state of suspended animation. Like many in the industry, we anticipated a slower-than-normal recovery—the depths of the recent recession, staggering numbers of problem loans, the compromised state of the recovery and unfortunate political gridlock, have hamstrung any rebound. But the extent of delay has been surprising. Without a prod from government regulators, banks and other lenders have continued to resolve problem loans at a turtle's pace, avoiding precipitous shocks to their balance sheets. As a result, the opportunity to invest in distressed assets has been limited.

Finally some momentum may be building for banks to sell off more assets at significant discounts. Although the majority of outstanding mortgage loans are not delinquent, many mortgages are under-secured, because of property value declines and increases in commercial mortgage credit spreads. Except in primary 24-hour gateway markets and the buoyant multifamily sector, asset cash flows have been compromised by seemingly chronic tepid tenant demand for many commercial properties—office, retail, and industrial. Even current loans with property values equal to or more than loan balances may find refinancing challenges at maturity as a result of more conservative loan-to-value and coverage requirements.

After peaking in 2010, bank net charge-offs remain well-above pre-crisis levels. Lenders have been selectively liquidating loans to raise capital and strengthen balance sheets, cautiously managing any losses against current earnings. This carefully controlled approach may have curtailed any surfeit loans in the secondary market to date, but the drawn-out economic comeback marked by persistent high unemployment and restrained leasing activity suggests it is only a matter of time before secondary market transactions intensify.