Three recent reports suggest that the "smart money" is moving in to scoop up the bargains in CRE:

"'Bottom-Feeding' Investors Drawn to US Real Estate in Hope Rates Stay Low" (Financial Times)

The beleaguered US commercial real estate sector has been attracting a new wave of money from sources including foreign banks, US private equity firms, and a leading Chinese sovereign wealth fund.

Market participants warn that the activity represents "bottom-feeding" by opportunistic investors whose strategies could be derailed by rising interest rates. Also, the deals done so far are tiny compared with the debts that need refinancing.

Nevertheless, the growing interest from investors is a sign of stabilisation, making it less likely that worsening commercial real estate conditions will sink banks and choke off a US recovery.

"We believe the real story is that capital is ready to buy, even though it may not be so visible today," said Bob Steers, co-chairman of Cohen & Steers, a real estate investment firm.

"Dimon Calls Commercial Real Estate a 'Train Wreck'" (MarketWatch)

J.P. Morgan Chase Chief Executive Jamie Dimon said commercial real estate is a "train wreck" during a speech Monday, but noted that many of the problems in the sector have already happened and won't affect the economy too much.

...

"Commercial real estate is a train wreck, but it's already happened," Dimon said during a speech at a J.P. Morgan /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 43.61, +0.12, +0.28%) health-care conference in San Francisco.

With roughly $3.5 trillion in commercial real estate loans outstanding, a sizable portion of that debt needs to be refinanced each year. However, the problem is that the value of the properties backing those loans has fallen, he said.

Investors specializing in distressed debt and foreign buyers have been attracted by the lower prices, which has helped refinancing activity. Deals often take the form of a recapitalization, in which the lenders become the equity holders, Dimon added.

"2010 REI Outlook: Real Estate Investors Planning on Buying Commercial Properties Like It's 2005" (National Mortgage Professional)

After a quiet year of investment sales, buyers are preparing to forge ahead with acquisitions in 2010. Two-thirds of investors (65 percent) who responded to the 6th Annual Investment Survey plan to boost their investment in commercial real estate over the next 12 months. That figure is up from 56 percent in the third quarter and 51 percent a year ago. The exclusive survey is produced jointly by National Real Estate Investor and Marcus & Millichap. The fact that buyers are once again returning to the table is a huge vote of confidence for a commercial real estate industry that has been slammed in the past year by falling property values, occupancies and rents. Respondents to the annual survey who do plan to expand existing portfolios anticipate an average increase of 26 percent, up from 24 percent in the third quarter and 22 percent a year earlier.

Call me a cynic, but the following article, "Blindsided By Hope: Investors Need to Watch Poor Fundamentals," at GlobeSt.com, a site which provides in-depth and breaking commercial real estate news around the clock -- and which might naturally be inclined to put a positive spin on developments in the sector -- seems to be telling a different story (italics mine):

NEW YORK CITY-Market energy, bolstered by marginal earnings growth, has outpaced the recovery of fundamentals. As investors look to take advantage of opportunities in the market, they may be ignoring the grim reality of weak asset indicators and a still-dysfunctional financial system, said panelists at Deloitte & Touche LLP’s Distressed Assets & Debt Symposium.

"I’m surprised that the market has jumped on what could possibly be short-term earnings," said Deborah Bailey, director of governance, regulatory and risk strategies at Deloitte. "There were clearly things that were broken and they haven’t been fixed yet." Regulators are still devising rules to prevent further systemic failure, but that process has been sluggish.

Jason New, senior managing director and co-head of distressed investing for GSO Capital Partners and the Blackstone Group, suggested that the stimulus-driven recovery is masking the risks still present in the market.

But Bailey said she shudders to think what would have happened without government sponsored actions. Stopgap measures, such as TARP and TALF, certainly halted further hemorrhaging of the market, said Bailey. The capital purchase program, for instance, provided floundering banks a lifeline during the desperate days of the crash.

However, the purchase of legacy assets through PPIP, she noted, has been far less successful and cumbersome as investors slowly wind through the bureaucratic process. The difficulty of determining pricing has largely hamstrung efforts to siphon off troubled assets.

Still, the FDIC is managing to clear its stock of repossessed holdings through foreclosure auctions, which are anticipated to ramp up in the coming year. In some respects, the agency, the prime market clearing mechanism, has become an RTC-like institution for smaller banks, observed David Ying, senior managing director of corporate advisory business and co-head of the restructuring practice at Evercore Partners.

For the larger institutions, the motivation to sell just isn’t there. Precipitous value declines--down some 40% from 2007 peak levels--would translate into substantial discounts and losses on assets brought to market. However, sales activity in the past six months eclipsed the transaction volume of the prior 18 months. If this trend continues, the market will likely see an influx of deals.

But some market observers remain leery of the continued poor performance of commercial real estate. Occupancy and rental rate growth is all but nonexistent across all property types. Randy Reiff, founder of Spartan Real Estate Capital LLC pointed out that relative value has improved and people are feeding into that excitement without necessarily acknowledging the poor performance of asset classes.

"The question with commercial real estate is: 'Are people continuing to watch fundamentals or are they being blinded by the technical effect," Reiff said. "The market traded off 30 to 40 points a year ago and everyone was saying the market rallied back. But fundamentals never came back."

Michael J. Panzner
Editor, Financialarmageddon.com

Michael J. Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes, published by Kaplan Publishing.