Sovereign wealth funds have high expectations of distress when it comes to U.S. commercial real estate assets. Media reports have bolstered the idea that not only can they strike great deals through the relatively weak dollar, but that fire sales are as abundant as a summer fruit basket in this land of milk and honey.

“Sovereign wealth funds say, ‘We can give you one billion dollars of equity, but we want prime office buildings at a 50% discount,’” said Marc Halle, a managing director with Prudential Real Estate Investors, at IMN’s Second Annual Summit on Real Estate M&A in New York this week.

To be certain, there are distressed apartment properties in places like Phoenix and even in certain parts of New York City, but there are no such deals on distressed office properties. Even then, these funds are not content with a 5% capitalization rate. Based on their perception of risk, they are seeking returns as high as 10%, according to Halle.

Neil Shah, president and chief operating officer of Hersha Hospitality Trust, believes that “they don’t want to look like dumb money and get in too early in the cycle.” That’s why, even after such deals as Boston Properties acquisition of four New York City office buildings owned real estate mogul Harry Macklowe’s for $3.95 billion, these foreign investors are still looking for discounts.

Finding little distress to be had, sovereign wealth funds have pulled back, says Jay Weaver, a principal with Walton Street Capital. Six to nine months ago, they were buying trophy assets. Now, these funds are waiting for the distress to hit on the office side in gateway cities.

Sovereign wealth funds have become very sophisticated and it is not the case that they will buy up everything, according to Sri Sambamurthy, a managing director of Starwood Capital Group. These investors have a long-term strategy, and are looking at major assets on the East Coast and hospitality properties that offer strong operating platforms and brands, he noted.

As for the question of when commercial real estate M&A activity will come back to life, Sambamurthy expects to see some movement closer to the end of 2009. In contrast, Weaver forecasts that M&A activity won’t pick up steam until the second quarter of 2009 — at the earliest. Weaver also notes that as much as $80 billion of equity capital is waiting on the sidelines, considering that access to debt funding for leveraged acquisitions is difficult to come by these days.

Hersha Hospitality’s Shah believes that there will be an M&A revival will begin revving up in 2009, with only a handful of deals getting done. He predicts that it will be 2010-2011 — when the credit markets have recovered — that M&A activity will return in full force. Shah also expects to see a robust cycle for real estate beginning in 2010, given that little new supply is being added.