The commercial real estate debt crisis is entering a new phase as banks increasingly accept steep discounts on distressed assets to clear their balance sheets and prepare for market re-entry. Industry professionals are reporting a significant shift in bank behavior, with lenders moving from demanding par value to accepting 60-70 cents on the dollar, and in extreme cases, even less.
Sean Sedaghatpour, Principal at Elisheva Realty, has been tracking this change closely through his work with distressed assets in New York. His observations reveal a banking sector slowly emerging from what he describes as a prolonged period of market paralysis.
“The story started out being, you talk to the bank, ‘No, we need par.’ Then 15-18 months ago it was ‘No, we need 90 cents.’ Twelve months ago, ‘No, we need 80 cents.’ Now you’re seeing some banks saying ‘We’ll take 60 cents, we’ll take 70 cents,’ and in some cases, in very extreme cases, they’re even taking less than that,” Sedaghatpour explains.
The Liquidity Imperative
This notable shift in bank pricing reflects a fundamental business reality: banks need liquidity to resume lending operations. As Sedaghatpour notes, “A bank makes money through the interest it makes on loans. They don’t have money to lend, so they can’t make money. If all their money is going towards making sure they don’t go out of business, and there’s many, many banks in that position right now.”
Banks are increasingly willing to walk away from properties entirely, particularly when dealing with assets carrying significant regulatory risks. In New York’s complex regulatory environment, properties with extensive Housing Preservation and Development (HPD) violations can quickly become liability traps.
“A lot of times, it’s so bad that the deed owner is willing to just essentially hand the keys, and the bank is saying, ‘We don’t even want to touch the keys,'” Sedaghatpour observes. “If you’re the bank and you don’t know how to operate these properties really well, and the property has hundreds of violations on it, the next thing you know, there’s a $750,000 lien. Your debt was $2 million and now the city has a first position lien.”
Specialized Expertise Required
These distressed asset opportunities aren’t accessible to typical investors. The complexity of navigating regulatory requirements, understanding violation structures, and executing turnaround strategies requires specialized knowledge and established relationships with municipal authorities.
“You need the bank to know that you have the ability to not only close, but to execute, because a lot of this stuff requires the city vetting you,” Sedaghatpour explains. “Part of your due diligence is to go to the city and say, ‘Hi, it’s me again. I understand these are the problems, and this is what we’re going to do to turn it around.’ You need to be in a position for them to say, ‘Good, we’re excited to work with you.'”
This vetting process creates a natural barrier to entry, limiting opportunities to experienced operators with proven track records in distressed asset management. The city’s willingness to work with buyers becomes as crucial as the financial aspects of any deal.
Political Uncertainty as Market Catalyst
Looking ahead, political developments may paradoxically extend these opportunities. Sedaghatpour suggests that uncertainty around New York’s mayoral election could actually prolong the distressed asset cycle, as some market participants adopt a wait-and-see approach.
“A lot of fear is going to enter the market of ‘what if, what if, what if?’ It’s actually going to extend the opportunity,” he predicts. Some high-level developers are reportedly considering leaving New York entirely, which could create additional market disruption.
Market Outlook
The timeline for broader market recovery depends largely on banks’ ability to clean their balance sheets and rebuild lending capacity. Sedaghatpour anticipates that within 12 months, assuming political stability, “there’s going to be a handful of banks that were players in the last cycle that are going to start to re-enter the market.”
However, if political uncertainty persists, the recovery timeline could extend significantly. “If the front runner does get elected, I don’t know if there’s going to be too many that were able to raise enough money to get back in,” he notes.
The current environment presents a unique opportunity for sophisticated investors with the expertise and relationships necessary to navigate complex distressed situations. As banks continue their gradual emergence from what Sedaghatpour describes as a “coma,” the ability to execute on these challenging assets will likely determine which players emerge stronger in the next market cycle.
For real estate professionals and investors, understanding this shift in bank behavior and the specialized requirements for distressed asset acquisition will be crucial for capitalizing on emerging opportunities in an evolving market landscape.
