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The State of Commercial Real Estate

Commercial real estate generally lags behind economic recovery by four or six quarters, 2010 appears to be a transition year, setting the stage for the next upswing.

David J. Lynn, Ph.D., contributing writer for the National Real Estate Investor, reported that we’re beginning to see the early stages of recovery for commercial real estate in his article “As Storm Clouds Lift, Commercial Real Estate Transitions to Sustainable Growth.” This coincides with the glimmer hope we’re getting from the talk of an economic recovery. Though, as Lynn writes, commercial real estate generally lags behind economic recovery by four or six quarters, 2010 appears to be a transition year, setting the stage for the next upswing.

We’re beginning to see the early stages of recovery.

For more than 30 years, the National Council of Real Estate Investment Fiduciaries (NCREIF) has been tracking returns on properties owned by institutional investors. In the second quarter of 2010, they reported that market saw an overall appreciation return for the first time since mid 2008.

While this is good news for commercial real estate, it’s still facing a number of challenges. Recovery will be slow, at best, starting first for well-leased core properties. Lynn observed that though the core properties in primary markets were showing an increase, pricing continues to decline in the Class B and C properties in both the secondary and tertiary markets. The good news: this decline is at a slower rate than before.

With vacancy rates high, construction financing limited and low rental rates, landlord leniency is growing in the commercial real estate sector, such as allowing more time to pay rent. These concessions help to level off the vacancy rates.

The National Association of Realtors® reported in their latest Commercial Real Estate Index that the subleasing sector still remains high. After a few big-name defaults (HousingWire reported that the Glazer family defaulted on four more mall properties and Vornado Realty Trust recently foreclosed on two loans for a mall in Washington, D.C.), lenders are more apt to give renters more time before going into foreclosure. While development appears to be stagnant, acquisitions are starting to rise. 

HousingWire also reported that the odds of commercial real estate transitioning to being self-sustaining in 2011 remain better than 50 percent. However, office vacancies will continue to increase for the beginning of the year and then level off after the second quarter. While the housing vacancy rates — both apartment rental and multifamily homes — will continue to decline.