by Mark Heschmeyer for CoStar Group

If conditions in commercial real estate have indeed hit bottom, then an increased amount of distressed assets could hit the market this year — and values could also begin to tick up. That is the general consensus of industry professionals that CoStar Group interviewed for their outlooks on distressed investing in 2011.

Contributing to this expectation is a change seen in the dynamic among lenders. Up until very recently, banks have been reluctant to foreclose on distressed loans because they would be forced to take huge write downs – i.e. losses on those assets. So a policy regarding under-performing loans on commercial real estate that has come to be called “extend and pretend” has become prevalent in banking for the last three years.

But if as industry players now suggest that values have stabilized, then the uncertainty that bankers have faced on valuations will begin to clear up.

“We think that the distressed CRE market will continue to see increased deal flow in 2011. As the broader economy recovers, banks are more capable of accurately assessing value and realizing a more clearly defined exit from nonperforming loans which bank balance sheets are now able to handle,” said Kevin Brands, managing principal of Holt Lunsford Commercial in Addison, TX. “Thus, the banks see a bid ask spread narrowing and will show progress in concluding their “extend and pretend” strategy and push the distressed assets onto the market.”