Signs of Improvement in Commercial Real Estate

By:: Kara Johnson | May 11, 2010

Senior real estate executives are beginning to see signs of improvement in the commercial real estate market, according to a new survey by a leading industry group.

The decline in commercial real estate values appears to be bottoming out and credit for making purchases is becoming somewhat more available, according to the latest quarterly “Sentiment Survey” by the Real Estate Roundtable. At the same time, considerable uncertainty remains over the state of the economy, with many executives saying job creation needs to be much stronger for a sustained recovery.

"Clearly, the sense of gloom that prevailed a year ago has eased, property values no longer seem to be in a freefall, and market participants are feeling more confident,” said Roundtable President and CEO Jeffrey DeBoer. “Some are even saying we may finally be at or near the bottom of the commercial real estate downturn, which would mark the beginning of the road back to recovery.

“But, while sentiment is up, that's not to say things are good,” he continued. “Refinancing remains difficult for many, and defaults are still rising, which means more pain ahead."

Of the more than 100 senior real estate executives participating in the survey, 82 percent said market conditions are better now (second quarter of 2010) than they were one year ago, up from 71 percent in the previous quarter. The survey’s “current conditions” index stands at 74, up from 56 in the first quarter of 2010; it hit a low of 17 during the fourth quarter of 2008, in the midst of the collapse of the financial markets.

Just over half – 56 percent – of executives surveyed expect commercial real estate values to be somewhat higher one year from now, compared to about one-third – 35 percent – who expect them to remain the same. Only 6 percent expect that commercial real estate values will continue to decline.

Looking ahead, it appears there will continue to be major problems for property owners who need to refinance maturing commercial mortgages. Due to the steep declines in commercial real estate values over the past 18 months, many lack equity needed to secure new loans. Elizabeth Warren, chair of the Congressional Oversight Panel, recently forecast that more than half of all commercial real estate loans could be underwater by the end of 2010.

Although 65 percent of survey respondents said that debt capital is more available today than one year ago, many qualified their remarks by adding that such availability was limited to certain areas or to properties with positive cash flows.

The Real Estate Roundtable is an industry trade group focusing on national policy issues related to real estate and the economy at large. The full report is available at www.rer.org/.

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