The recovery in commercial real estate hinges on 10 key factors

Scott T. Pickett, president, PSB Realty Advisors

As published in Scotsman Guide's Commercial Edition, April 2011.

It has been said that the lending and finance markets must wake from hibernation before commercial real estate recovery will happen. Well, the markets are stirring.

Commercial real estate financing is gaining momentum as the fundamentals of underwriting have been adjusted to meet current economic challenges. The realignments include aversion from the aggressive lending that contributed to the most recent economic crisis. Initially, this aversion was itself aggressive, and new financing virtually dried up. But as the economy itself has begun to creep toward recovery, lending has started to loosen up.

In fact, there are many positive signs that the market is moving toward recovery and ultimate growth. Commercial mortgage originators who are aware of the 10 critical factors affecting the commercial real estate industry’s comeback can prepare themselves to capitalize.

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Commercial loan originations in 2010 increased 36 percent from 2009, according to the Mortgage Bankers Association. In a recent industry survey, 74 percent of lenders indicated they expect credit to become even more available this year. Transaction prices for commercial properties sold by major institutional investors increased 11.9 percent this past fourth quarter and 19.3 percent for 2010 overall, according to an index from the Massachusetts Institute of Technology’s Center for Real Estate.

In some markets, commercial property values have increased more than 30 percent from their 2009 lows, but the climb is not distributed evenly across the country. Although major markets are improving, the secondary markets are still struggling.

As the market moves forward, it is important for mortgage brokers to recognize and stay informed about the various issues that will impact commercial lending and recovery most. Here’s a look at the top 10 factors influencing the market’s recovery — and your business.

1. Appraisals

First and foremost, it is key that the volume and value of appraisals increases early this year. In a low transaction market, the lack of significant volume leaves appraisers in a conservative mode, especially on noninvestment-grade real estate.

With few sales transactions, appraisers are challenged to determine values accurately with limited or skewed data. Low appraisal values in turn are inhibiting lenders’ ability to complete loans on viable projects. From an analytic perspective, the debate in this area is whether more appraisals result from improved market performance or whether more appraisals drive improved performance.

2. Job growth

Job growth is at the crux of reducing the record-high vacancy rates that have plagued office, industrial and retail properties in the past few years. These rates have slowed, but job growth is critical to keeping them from skyrocketing again. Indicators show improvement in the job market as the unemployment rate declined by 0.4 percentage points to 9 percent this past January — the second-straight month of decline, according to U.S. Bureau of Labor Statistics data.

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