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NEW YORK CITY-Far from losing interest as the expected flood of distressed opportunities remains a trickle at best, institutional investors are patiently biding their time. They expect that their patience will be rewarded eventually, according to the third-quarter PricewaterhouseCoopers Korpacz Real Estate Investor Survey, released Tuesday.

“Many of these investors had been expecting opportunities to arise before now, and many are surprised that there has been such a lack of forced sales and more motivated sales on the part of distressed lenders and distressed property owners,” PwC’s Susan Smith tells GlobeSt.com. At the same time, she notes, they’re seeing fundamentals continue to decline and the economy continuing to struggle.

The still-shaky economic outlook “is actually giving them more confidence, for lack of a better word, that opportunities for distressed sales are going to open up,” says Smith, director of PwC’s real estate advisory practice and editor-in-chief of the survey. “If anything, they’re looking at the distress in the market as a positive. It’s kind of a weird time, as they realize that they can capitalize on the pain of other owners.” And their positions to do so only grow stronger as they raise more funds.

PwC notes that while some investors are looking to the $153 billion of CMBS loans due in 2012 to spur buying opportunities, commercial banks account for a much greater percentage of the total looming debt and could therefore provide distressed sales sooner than 2012.

“According to the Mortgage Bankers Association, CMBS and other securitized loans account for 21% of the outstanding commercial real estate debt while commercial banks account for about 45% of the debt total,” the report states. “Certain investors believe that many banks are playing the ‘timing game’–attempting to replenish their capital reserves while the economy and industry both strive to recover and bolster values. If successful, the distressed sales activity that many eager buyers were anticipating would be limited.”

However, Smith sees this as a risky strategy on the part of lenders. “Eventually, something is going to happen,” she says. “Banks can only hold on for so long. Their portfolios are not worth what they were a year or so ago. Property values have declined and many of their borrowers do not have the ability to refinance; they don’t have the necessary equity that banks are now requiring to close the gap.”

The PwC report notes that surveyed investors believe the massive amount of leverage used to fuel the buying frenzy during the peak of the cycle in 2006-2007 will greatly increase the number of commercial properties for sale. This will be due primarily to owners who are unable to cover their debt service obligations and incapable of refinancing.

Pricing will be the next challenge for investors, the report says. The bid-ask gap still in effect across all property sectors and geographies is widened by the fact that, as Smith says, “They’re not looking for unoccupied or unstabilized assets. Many are looking for good properties at distressed prices.” As a result, some investors are staying focused on asset management and value preservation rather than on new acquisitions, according to PwC.

The surveyed investors, which run the gamut of institutional players, expect further deterioration in fundamentals into 2010. For example, the survey reports “much lower market rent change assumptions in cash flow analyses” for all 28 surveyed markets. Especially steep declines are expected in the suburban office market, where market rents could drop as much as 20% in the coming months. CBD office rents could see a drop of as much as 10%, and so could national power center and national warehouse rents, the report states.

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