Lack of Liquidity Stalls Commercial Market

An expert in real estate finance said a lack of liquidity remains the major obstacle to a recovery in the commercial real estate markets at least until the end of this year. "We will also see a curtailed supply of new construction, more focus on cash flow, new incentives for tenants, greater equity required of borrowers and increased government regulation," said Stan Ross, chair of the University of Southern California's Lusk Center for Real Estate. Citing retail bankruptcies, bank closures, greater unemployment and an oversupply of office space, he does not see commercial or residential real estate markets starting to recover-and then only slightly-until the fourth quarter of 2009 with another full year before they grow again. Among the problems facing property owners are declining cash flows and debt coming due that cannot be refinanced while credit is scarce. "Borrowers can still avoid foreclosure with creative restructuring, giving the lender an equity position in return for a lower interest rate or getting a temporary moratorium on principal payments," Mr. Ross explained, pointing out that borrowers should demonstrate a willingness to take action by selling assets to raise cash or getting new equity investors. But there is an opportunity for well-capitalized opportunity funds to buy distressed assets or debt at a deep discount, he said.