For the past four years there has been a very active demand for advisors and lawyers and other professionals who could assist borrowers with working out problem loans with servicers. Many believed there would be a major increase in distressed loans and assets coming to market by this time. It is essentially over. Many of my friends who have made a nice living from such advisory work are telling me that there are few new assignments. It appears that now, almost five years after things began to disintegrate, that the really bad situations are worked through, either through a bankruptcy, foreclosure, or other solution such as deed in lieu.

Many other distressed loans have been modified, paid off, refinanced at new rates of 4.75% or 5.25% which makes the asset cash positive, or there was simply had a rescue capital partner who purchased the loan and worked it out. This is not to say there are no more distressed loans. There are tens of billions of dollars of them over the next two years. The difference is, with the economy stabilized and creeping to better, some assets now cash flow, like hotels and multi-family. Rents for office and retail are at least stabilizing, and in some markets they are rising. That leaves the distressed pool consisting of a lot of poorly managed assets, and there is the main opportunity for investors and operators. Servicers do not want to lose the fee steam they have been enjoying, and so often they are choosing not to foreclose or sue any longer. Owners who may hold a distressed asset, especially hotels, office or retail, are choosing, in some cases, to sell the asset to a more qualified manager/owner at a discount since they know they cannot put in the required capital improvements or they are really not in that segment of the real estate business. This is the main opportunity going forward. Either the asset needs major capital investment, or it is just mismanaged. Usually it needs millions of capital investment to make it meet brand standards, or to be a competitive retail or office asset.

You need to get out to the secondary cities to find these situations. The six prime markets have already been pretty well picked over and are seeing rising values and rents or revpar. Cap rates are now too low to justify many acquisitions. Go troll the Midwest and west. These are good cities in many cases and very good assets which simply need capital infused are out there to acquire if you look hard.