What’s Prolonging the Commercial Real Estate Recovery

Although signs are mainly positive for a commercial market recovery in 2011, overall numbers are still showing this recovery to be less than vigorous. Doubt in the commercial market sector is a major issue. The industry cannot fully recover unless and until owners, lenders, investors, developers, operators, and tenants begin to see strong signals that the economy and the industry have hit bottom and started to make their way back up.

One glaring factor preventing any obvious suggestion of a recovery is probably the same reason that is presently providing buoyancy to the commercial market; and the same one that has been keeping many property owners solvent over the past couple of years.

This factor is being called the “amend and extend” practice that many lenders have provided to get around calling in loans that are no longer practical in light of present property values.

As an alternative to calling shaky loans and forcing foreclosure on the building owners, many lenders will “extend the terms of loans unlikely to return full value on principal and interest accrued extending the loan terms.”

In effect, the lenders act as if the loan is still workable, when in actuality, all that extending these loans does is keep delinquencies and defaults in check. The lenders also believe, even if the property value isn’t there, the loan has been performing and should continue to do so. Although doing this saves the commercial owners from defaulting and keeps the banks in the black, it artificially places a floor under the market that makes it impossible to know the bottom has been reached.

Luckily, even through all this, the commercial lending market cannot totally hide the fact that an overall improvement appears to be imminent. Additionally, there are encouraging signs for recovery with upbeat developments like an improved transaction stream, enhanced capital markets in real estate, the foundations of apartment, office, hotel and industrial properties improving, and the rebounding of the REIT’s.

When the other commercial industry members see these signs with the same viewpoint, the early phase of the commercial recovery should be forthcoming.