Finance: Still Paralyzed
- Jun 22, 2009
For approximately 12 months, conventional wisdom has suggested that the wide bid-ask separation between sellers and investors would soon disappear and transaction activity would significantly increase at a lower pricing point. Continued deterioration of fundamentals as evidenced by a steadily increasing CMBS delinquency rate (now at 2.1%) would seem to support this forecast. But, as if defying gravity, transactional activity remains stagnant with capital ready to invest but not enough sellers willing to sell at price points required by investors.
There seems to be several explanations for this continued paralysis. Existing assets (equity and debt) are generally held by more strongly capitalized owners than during past downturns, enabling these owners to hold assets until the economy starts to recover and capital markets become more liquid. Government infusion of capital has strengthened financial institutions’ balance sheets thereby reducing pressure to sell assets at substantial discounts and making loan extension and restructuring more likely. Delinquent CMBS loans are turned over to special servicers who often hold the subordinated bonds and, to the extent permitted by the documents, would rather restructure or hold assets than sell at prices that would wipe out all but the senior position.
So the bid-ask remains wide and activity remains stagnant. Will this continue until current owners’ perceived values are supported by a recovering economy and more liquid capital markets or will more owners need to market assets at lower prices indicated by some recent trades? Let us know what you think.