Private equity hasn't been flexing its muscle only in the fundraising arena, though. Sandy Monaghan, managing director of Cushman & Wakefield's capital markets group, notes that while private equity bought up major special servicing firms earlier in the cycle, the private equity-owned special servicers in turn are branching out.

"The special servicers are forming brokerage units or acquiring them," he notes. The Fortress Investment Group- owned CWCapital Advisors, for example, acquired Rockwood Advisors, while Berkadia Commercial Mortgage has formed an internal unit comprised primarily of former C&W brokers. And in the latest manifestation of this trend, C-III Capital, which in 2010 acquired Centerline Capital Group's special servicing business, in June announced a deal to buy NAI Global.

Monaghan sees this move into brokerage by special servicers, and their private equity parents, as "another way to capture fees." That imperative has led to co-brokerage arrangements with larger full-service firms. Given its "very limited physical footprint," Monaghan says, "it's not reasonable to expect that Rockwood could transact business effectively in all parts of the country on behalf of CWCapital, especially given the high percentage of low-balance assets. It's not as though you're selling a $100-million asset; you're selling a $5-million asset in a tertiary market. So in almost every instance, those brokerage units are going to partner" with firms such as C&W.

As another illustration, special servicer LNR has formed Archetype, a debt fund. "Not only are they going to seed assets into their own promoted auctions, but they're also looking to build a business around it and solicit assets from other property owners," Monaghan says. "In the early going, there was some discussion about ‘why are they buying these servicers? It's got to be more than the fees,' " notwithstanding that the servicing fees themselves have escalated over the past 18 months. "So there was speculation that they were going to buy assets out of the pools, because the servicing agreements allowed for that. But we've seen very little evidence so far of the special servicers actually acquiring loans or REO assets out of their own portfolios." He adds that he's been told that some of the other big servicing firms have raised equity to buy loans or REO assets, although there's been little evidence of this so far in the way of transactions.

The Financial Accounting Standards Board, which already has corporate tenants and commercial landlords nervous with its proposed lease-accounting changes, in April issued an update to the standards for loan modifications. Titled Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring, the update is intended to improve financial reporting by creating greater consistency in the way GAAP is applied for various types of debt restructurings, according to FASB.

FASB says the update clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a loan modification meets the criteria to be considered a TDR, both for purposes of recording an impairment loss and for disclosure of the restructurings.

"The increase in loan modifications caused by the recent economic downturn led investors, regulators and practitioners to ask the board to clarify what types of modifications should be considered troubled debt restructurings for accounting and disclosure purposes," FASB chairman Leslie F. Seidman says in a release. "This update provides that guidance."

For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011 and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. For nonpublic entities, the amendments in the update are effective for annual periods ending on or after Dec. 15, 2012, including interim periods within that annual period.

If lenders are required to reclassify more troubled assets, "it could make them more willing to work deals out and maybe sell them, because they now have to reflect this on their balance sheet," says Monaghan. "Up until recently, they've been given a free pass to handle things the way they thought was appropriate."

He predicts that if the regulatory standards become stricter, coupled with the fact that many of the surviving banks are "healthier than they were a year ago," the institutions will look to "clean up their balance sheets and remove a lot of this underperforming real estate." Monaghan notes that C&W's Florida region in particular has been active with bank sales, particularly with undeveloped land. "More recently, they've started to work on improved property with the banks," he says. "As markets have gotten better, they may think it's a better time to trade the assets."

Grinis similarly sees "a number of large transactions coming to market. Each has its own reason, but one important pattern is that, with the end of quantitative easing and the clearer environment of budget deficits that are no longer going to be tolerated, a slowing economy is likely." As a result, he sees sellers "acknowledging that for a while, this is as good as it gets," and therefore a good time to exit.

While investors' appetite for risk has sharpened, Grinis says, "I still characterize the market by haves and have-nots. I'm not certain that this has changed" in recent months. High-profile trophy assets have been the backbone of the market, "because the bid and ask were much closer together and much easier to bridge. On a pound-per-square-foot basis, they made sense for both buyers and sellers." Not so with have-not assets, where the bid/ask gap remained wide.

In the market for tertiary products in 2011, "I see sellers having a better understanding of what they own and a better acceptance of the market fundamentals," says Grinis. "With fl at employment growth, if a building isn't leased up now it isn't going to be. So they accept the need to sell at a more competitive price." The rebound in pricing for multifamily and lodging assets is well known by now. "The question is whether retail and office will start to come back as aggressively," Grinis says. "With the consumer still very leveraged and a cautious climate, I don't know if we're going to make quite the aggressive adjustments that we saw in the two other asset classes," and that will be reflected in the pricing.

He notes that paradoxically, the pricing on solid, well-leased core assets may currently carry more risk than that for opportunistic buys. "You're buying something at a four-cap and you're heading into inflation," Grinis says. "There's a fair amount of risk there."

Even so, the appetite for core dovetails with lenders' willingness to lend. Grinis says, "Although leverage has clearly come back, the underwriting is still not 2008 underwriting." Notwithstanding the easing of credit observed by Pontius, Grinis notes that pro forma NOIs and optimistic growth projections don't apply; "it's still much more cash flow-based. That's probably a healthy thing."

In June, Trepp reported that both the pace of bank failures and CMBS delinquencies had declined in the prior month. Following a sharp increase in April, May's monthly total of five bank closings was the second-lowest since July 2010, although commercial real estate loans comprised 76% of the unpaid balance among those banks' nonperforming loans. The CMBS delinquency rate dipped five basis points to 9.6%, and while the May decline followed a spike in April, Trepp believes the drop reflects a gradual leveling off in problem CMBS.

Given that the FDIC's projections of bank closings for 2011 are "down materially" from the 2010 total, Monaghan says it stands to reason that the CMBS delinquency rate is also stabilizing. "It'll probably stay pretty static," he says. "In the past, it was pretty lumpy-when you have something like Stuyvesant Town, where you were talking about a $5-billion restructuring, that's going to have an impact month over month. But there's nothing we see on the landscape that's going to create as much volatility as there was in the past." However, Monaghan points out that special servicers have told him that on the REO side, "their asset inventory is increasing faster than their loan workouts." As a result, he adds, "while the rate of deals that are becoming delinquent may be stabilizing, the number of deals that are being foreclosed upon and ultimately sold will continue to increase over the next 12 months."

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