It has been widely reported that the commercial real estate market has rebounded and that valuations have slowly come back to their highest levels since the start of the Great Recession. Headlines have trumpeted the sale of trophy assets in the many of the primary markets throughout the country. But has it really come back? Costar and others have reported that liquidity in the secondary markets and non-investment grade assets is still spotty at best.

Sales velocity has improved in select classes and markets and is starting to spread to the overall market. Multifamily property sales have been the strongest and are transacting at a rate almost on par with the mid-2000’s valuation and volume levels. However, the industrial, office and retail sectors continue to lag by over a third from pre-recession sales volume levels. One would think that with lenders aggressively lending again and with a large amount of capital chasing deals that liquidity would be much better in these markets as well.

Unfortunately, the market disconnect is in the offerings. Investment grade product is being snapped up quickly while the outliers sit there unnoticed. As such, a significant chunk of investment capital looking for investment grade properties is having difficulty being placed. Non-investment grade properties are just not attractive to many of today’s buyers. This has created an environment of the “haves and have not’s” with public and private REIT’s, family offices and other high net worth buyers chasing a limited pool of deals. Cap rates on single tenant net leased offerings with 20 year leases and investment grade tenants are still showing up at sub 6%. But the number of offerings that fall outside of this limited scope are languishing in the market.

So how does this effect an owner of a secondary market, non-credit tenant occupied property? It is hard to argue that the market overall has come back. Liquidity is still tough and the ability to refinance a maturing loan is not an easy task. The days of 85-90% loan to value non-recourse debt is long gone. Secondary market properties require a full guaranty and at least 25% equity in the property by the sponsor. Refinancing a maturing loan is possible but the pitfalls to the borrower are still many.

Navigating this still precarious market requires a strong strategic plan and a firm execution in dealing with the existing lender and the potential new lender. The borrower/owner must be prepared to answer a lot of hard questions and fully disclose its financial history on the property. In the end there are plenty of deals getting done – they just are not as easy and painless as they used to be. Welcome to the “new normal”.