Today's Buyers and Sellers

The commercial real estate market was no exception, with common estimates of CRE value declines in the range of 30% to 40%. This precipitous drop in value combined with the collapse of the secured real estate financing market has led to an 80% decrease in transaction volume from 2007 to 2009, according to Moody's. Today's current perception of more stable capital markets and an improving general economy appears to be thawing the decision-making paralysis that has persisted. Today, secured financing for real estate is still difficult to obtain and buyers and sellers of commercial real estate are slowly working through mismatched pricing expectations.

On the seller/supply side of the transaction equation, current owners lack the impetus or pressure to sell at today's lower values. Low interest rates on in-place debt have allowed owners to maintain debt service despite weakened operating performance. Banks, reluctant to write-down the value of loans made at the height of the market, are extending near-term maturities.

Moreover, the majority of commercial real estate debt originated at the height of the market has not yet matured. For example, CMBS maturities are expected to increase from nearly $20 billion in 2009 to approximately $70 billion in 2012, according to Bloomberg data. Sellers will not be forced to the table until external catalysts such as debt maturity or debt service defaults occur.

On the buyer/demand side of the transaction equation, a tremendous amount of capital continues to amass on the sidelines. Private equity firms have raised distressed real estate opportunity funds. Public REITs have recapitalized through equity offerings. Sovereign wealth funds remain positioned to invest. Although deals have been scarce, the few that have come to market have seen interest from aggressive buyers and have priced well.

Despite this standstill in the private commercial real estate transaction market, the past year has witnessed great opportunities for investors willing to pick their spots in real estate securities. Those who invested in GGP, public REITs or heavily discounted mortgage debt at bargain prices in 2009 have enjoyed outsized returns as the market has stabilized. This differs from the Resolution Trust Corp. era of the early '90s when the real estate capital markets were less developed and asset transactions were the primary opportunities. The challenge for today's investors is to avoid evaluating today's opportunities through the lens of the early '90s.

Over time, the bid-ask spread between buyers and sellers always converges. Core assets with high occupancy and quality tenants in desirable geographic markets are likely the first to trade at reasonable values. The relative certainty in cash flows is attractive to yield-seeking investors, particularly liability-driven entities such as pension funds and insurance companies who need current income to offset known payouts. The value-added, opportunistic and distressed situations will also materialize but will appeal to a different and more aggressive buyer such as opportunity funds.

More generally, we expect that as the volatility of the past two years is replaced by relative economic stability, we will see a steady increase in transaction volume. We do not, however, expect a meaningful increase until debt maturities begin to accelerate. Our recommendation to our clients is that they be ready with capital when these maturities start to unfold because opportunities will abound.

David Lazarus is senior managing director at EdgeRock Realty Advisors, an independent investment banking firm dedicated exclusively to the real estate sector. He can be reached at dlazarus@edgerockadvisors.com. The views expressed here are the author's own.