Forrest Stuart MacCormack

The first thing you learn in Economics 101 is that nearly everything in the world is driven by supply and demand. This one simple concept can help to explain many a complex problem in the business, economic, and social worlds—as well as why it was so difficult to find a Tickle Me Elmo doll a couple of Decembers ago. Basic supply and demand is also why I am determined to give you a cautionary warning this month.

About what, you ask? About the herd mentality that seems to have overtaken the industry in the past few months. At nearly every industry meeting and event, and on many a phone call, I have heard the same thing again and again: “We’re raising a fund focused on buying distressed assets,” or “We’ve launched a distressed assets division.” Multifamily players entering (or considering entering) this arena today include firms such as Place Properties and Lane Co., Laramar Communities and Waterton Associates. What’s more, every brokerage firm, from Sperry Van Ness to Colliers International, has a division—even if it’s only one person—dedicated to watching maturities and sniffing out properties on which to prey.

Unfortunately, right now, these vultures have nothing to hunt. Most owners so far have been able to refinance troubled deals and extend their terms by a few more months, even years—perhaps enough to stave off financiers through these trying times.

These dozens of distressed asset buyers—and the dozens more swooping in on a daily basis—are all watching and waiting for the next great real estate opportunity. The problem is that when the right asset finally comes along, there will be so many players waiting to pounce that the price will not be right. The value that one inherently hopes for in a “distressed” buy will evaporate amongst the competition. None of the buyers will get exactly what they’re looking for, and the entire philosophy behind the shift to distress will fall woefully short.

What’s more, if the current refinancing trend continues, those days may never come at all. What will happen then to these emerging funds? Will they turn into sources for development capital? Will they focus on green or sustainable acquisitions? Is it too early to speculate an answer?

I guess I’m skeptical. I believe companies should conduct solid due diligence before jumping on the distressed assets bandwagon. Instead of expanding into unknown markets and uncertain opportunities, do what you’re already doing even better. Focus in on your pricing and valuations; find niche markets and products; get creative. And if distressed asset acquisitions fit neatly into your long-term strategic plan, then, by all means, forge ahead.

But do it with care and restraint—and not just because everyone else is doing it. As your mother probably once told you, “You wouldn’t jump off a bridge just because all your friends are doing it, right?” Let’s hope that cliché holds an ounce of truth for multifamily players. Otherwise, the industry may find itself plummeting quickly into a pile of crushed rocks.