CRE Stabilizing, But Recovery Is Slow

May 17, 2010
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Although the decline in the commercial real estate (CRE) markets and property values has begun to level off, and capital is becoming somewhat more available, there is still tremendous uncertainty about the pace and strength of recovery, according to The Real Estate Roundtable’s latest quarterly “Sentiment Survey.”

Of the more than 100 senior real estate executives participating in the Q2 survey, 82 percent characterized market conditions today as better than a year ago (up from 73 percent in Q1), although only 17 percent said conditions are “much better.” The “current conditions” index hit a low of 17 in Q4 2008 (during the near-collapse of the U.S. financial markets), then rose to 56 in the final months of 2009.

“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.”

Although it is difficult to gauge property values definitely at a time when very few buildings are changing hands (transaction volume is down 80 to 90 percent since 2007), estimated values are down by as much as 40 or even 50 percent in some market segments. Looking ahead, 56 percent expect valuations to be “somewhat higher” a year from now and 35 percent expect them to remain “about the same.”

Despite these encouraging signs, the sharp devaluation of commercial properties over the past 18 months has left many owners with vastly reduced equity, just as lenders have been demanding larger down payments in order to refinance maturing loans. Joint Economic Committee Chair Carolyn Maloney (D-NY) warned last summer that if commercial real estate borrowers cannot refinance or pay off the hundreds of billions of dollars in debt coming due, then “we could expect to see the default rate on commercial mortgages climb much higher.”