While German and Chinese investors are already buying assets at discounted prices, many domestic investors are hoping to time the market to pick up even better deals.

With some $1.5 trillion in commercial mortgage debt expected to mature over the next three years and only $300 billion in equity sitting on the sidelines, more distress is imminent, according to Jeffrey Rogers, president and chief operating officer of New York-based valuation and consulting firm Integra Realty Resources.

Integra's clients include pension funds such as the California Public Employees' Retirement System, and investment banks like Goldman Sachs and Morgan Stanley.

“Whenever you're in that type of environment, where you don't have the liquidity to take out the mortgage debt, prices come down,” he explains.

The imbalance should result in a further decline in commercial real estate valuations. Over the next six months, Rogers predicts that property values will decline another 4% to 9%, on top of the 39% drop that's already occured since the peak in December 2007.

Currently, 48% of Integra's valuation assignments involve distressed assets, defined as real estate owned (REO), short sales, assets refinanced with an equity infusion, failed bank assets, assets resulting from bankruptcy, and assets with significant deterioration in operating income.

Real-life scenario

What will bring more distress to market? Rogers offers up this example: An investor acquired an office building in New York at the peak of pricing two years ago and didn't sign a personal guarantee. The property is underwater and its loan matures at the end of the year, but the bank is willing to extend.

Here's the sticking point: Although the property is 95% leased, a single tenant occupying 15% of the space is coming up for renewal at year's end. The big tenant says he'll leave unless the owner provides $2 million in tenant improvements.

“As an owner, am I going to put that money into an asset that I am under water on and having to extend my loan? No, I'm not going to do it,” Rogers maintains. “With my $2 million I'm going to go and buy a distressed asset and just write off whatever equity I have in that property.”

At this point the bank will have to decide whether to let the asset deteriorate further, to become an equity investor and retain the tenant, or to simply take the asset back and try to sell it. “This has already started to happen,” Rogers observes, “and is really at the crux of starting to get these defaults rolling.”