The real estate recession in the last few years has caused dramatic market decreases in the residential sector; however, the commercial sector, although still significantly affected, has seen less dramatic fluctuations.  In fact, there seems to be signs of a slight recovery, but the road will still be a long and painful one.

According to a US News Article entitled “Commercial Real Estate Coming Back, but Unevenly,” the Federal Reserve has stated that banks have already taken commercial real estate losses of $80 billion, which amounts to half of what the expected losses are to be as a result of the recession.  Some markets in the US, however, have seen rising commercial property values amounting to 30% from their lows in 2009. These include primarily the New York and Washington DC sectors.  The headquarters of the Mortgage Banker’s Association in Washington DC recently sold for  $101 million, this just a year after the trade group sold the building for $41.3 million. 

Just a year ago, it was predicted that there would be a huge increase in commercial loan failures.  However, at a recent hearing on commercial real estate held by the congressional panel who made this same prediction, it was concluded that the worst-case scenarios are increasingly becoming unlikely.  This commercial market increase isn’t seeing uniform results across the country. Many suburbs and smaller cities that have large amounts of commercial buildings are no longer making enough cash to pay their mortgages.  This has been a factor in increasing the delinquency rate on commercial mortgage backed securities to a rate of 9.34%, compared to the 1% rate in 2007. Many other properties have seen increases in their value; however, they are still worth less than their mortgages taken out at the height of the boom.

This rise in commercial values, however, is not reflecting a strong improvement in rents and vacancy rates.  The country currently has four billion square feet of office space, and the vacancy rates of this space is still near a record 18%.  As a response, investors are bidding up property values due to the low interest rates, which have resulted in less expensive financing and competing income-producing investments.  However availability of financing, which is the core of the real estate markets, still remains uneven. The volume of commercial mortgage backed securities will be at about $45 billion in the US this year, which is above last years $10.9 billion but still well below the $228 billion in 2007.

Analysts continue to warn that the increase in borrowing costs could send values falling again, because once interest rates begin to decrease, the market feels its affects suddenly.  The commercial real estate recovery will require fundamentals such as rents and occupancy rates to improve. In order for this to occur, the economy need to generate more jobs because until hiring increases, the demand for office, retail, and warehouse space will continue to remain weak.  In strong markets where these factors are stronger, investors will most likely continue to drive up property values. 

Recently the apartments building become very popular and attractive sector for investors. The fact that millions of families are switching from being homeowners to renters has caused the value of apartment buildings to soar.  Renters are now facing harder times finding apartments as incentives such as flat screen TVs and falling rents are now vanishing.  The affects of the rising apartment values are creating a boom for banks and other lenders who are sitting on billions of dollars of apartment building debt and other commercial real estate.

In some markets where the commercial value of real estate has risen, investors have begun to flip or quickly resell properties, which has not been seen prevalently since the boom years.  As mentioned above, the vale of apartment buildings are being propelled in part by the low interest rates that have made borrowing less expensive and the bond market less attractive.  For these same reasons, the values of office buildings, stores, warehouses, and other commercial properties are rising. 

In light of all the rises in the commercial real estate market, the apartment market is the healthiest part in this situation because of the cheaper ability for financing as well as the boost from powerful supply and demand forces, as the renter household statistic is not at 37 million after increasing more than 3.5 million in the past five years, partly because of the foreclosure crisis. 

However, statistics are still showing that the slump in the housing market is still far from being complete.  The Commerce Department announced that only 321,000 homes were sold in all the 2010, which goes on record as the lowest statistic dating back to 1963.  The national home ownership rate has also fell to 67% of US households in 2010.

The growth in job opportunities is playing a role in the higher demand for apartment rentals, and meanwhile the new supply of apartment buildings is at its lowest value in 20 years.  Although many markets are enjoying this rise in commercial real estate value, especially in the apartment sector, markets such as Houston, Jacksonville, Florida, and Memphis Tennessee are not seeing similar results.  Also, in other markets, analysts are worried about a risk of overheating again, since low interest rates are playing a factor in this rise in value. 

JOHN BUDZ

NAR President's Liaison to Poland