A large majority of the distressed acquisitions closed in 2009 were smaller deals of less than $15 million. In the fourth quarter, however, brokers and industry players were seeing larger deals change hands—and larger buyers emerge.

For the most part, the first half of the year saw smaller transactions backed by local country club money—high net worth individuals or families that are typically long-term holders. Many of these localized players sold assets in the run up in pricing seen from 2004 to 2007, and were flush with cash, closing deals with either all equity or little leverage. Nearly 85 percent of the distress buyers in 2009 fit into the category of smaller, private equity buyers, according to Marcus & Millichap.

In the fall, however, there seemed to be a shift. Consider Apartment Realty Advisors's (ARA) recent marketing of an ING portfolio of 10 assets located mostly in Texas (one was in Florida), which received more than 200 offers on it. The assets, like much of the distressed properties ARA is seeing, were mostly B and C quality.

“We are starting to see people coming off the sidelines who were quiet six months ago; there’s been a real change in the number of offers we get on transactions now,” says Debbie Corson, who heads ARA’s Distressed Asset Solution Group. “These larger guys with equity are really coming out of the woodwork.”

Opportunity funds that hoarded cash for much of 2009 are starting to realize that the discounts won’t be as jaw dropping as they once believed, and are starting to engage the market. Behringer Harvard has been the most active buyer, with some recent deals reaching up to the $80 million to $90 million range. Equity Residential has also been active, recently paying $100 million for a 326-unit property in Arlington, Va.

These acquisitions signal that it’s not just older Class B and C assets that are hitting the distress auction block. The larger deals are higher quality, constructed in the last 10 years, and have solid occupancy rates.

NAI Tampa Bay marketed a Class A REO asset of less than 100 units recently and received several full price offers. “Six months ago, it wouldn’t have been the case, but now, people are starting to realize they’re missing the boat,” says T. Sean Lance, president of the Troubled Asset Optimization Group at NAI Tampa Bay. “They’re willing to pay a little premium now as opposed to missing the deal completely and then have to compete for deals when prices go up.”

Then 12-property Bethany Portfolio deal in Phoenix attracted more than 50 offers in the fall, though deals of that size were few and far between in the fourth quarter of 2009. “There are only a handful of deals out there that the entire buying community is looking at, so it’s sort of an artificial feeding frenzy,” says Mike Kelly, president of Greenwood, Colo.-based Caldera Asset Management. “There’s not a giant, deep bench of qualified buyers. You’ve got a couple of private REITs, one public REIT, and a handful of high net worth guys who can close deals.”

The distressed assets coming in to Caldera generally fit one of two categories. The majority are C assets, but on the other side of the spectrum is a small but growing amount of construction loans going south on high-quality new or renovation deals.

“We all know those quality assets are there, but it just take a lot of time for them to come through the snake,” Kelly says. “It’s like what happened in '07 and '08 when it took so long for single-family houses to roll through the foreclosure process.”