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Mar 1

Most Stable Form of Commercial Real Estate

by Mary Teresa Fowler
Commercial Real Estate - Most Stable Industries

Commercial real estate covers varied sectors such as apartment buildings, offices, industrial spaces, and retail outlets. Certain areas perform better than others in an economic downturn. Which commercial sector will be the most stable during a recession?

Health-Care

Health-care real estate will do better than other commercial sectors because the field involves a necessity. Health-care will attract consumers - regardless of the economy. An individual might wait to make a large purchase or take a trip until the economy improves but people will not put off health care until after a  recession.

Unfortunately though, the sad reality is that people have delayed a trip to the doctor because they do not have the proper insurance. The Obama overhaul of health care, however, is expanding the availability of health insurance. As a general rule though, consumers have (and will continue to) seek immediate help for serious health issues.

REITs

A similar necessity drives office real estate more than the hospitality industry in economic turmoil. Business owners might cut back on corporate trips during a recession but, most likely, entrepreneurs will hold on to their offices. Hotel REITs might not perform as well as other categories. Yet health-care REITs can move upward during poor economic times. Jeff Theiler, an analyst at Green Street Advisors, a REIT research firm based in Newport Beach, California, said that health-care REITs made the most acquisitions in the industry last year.

Health-Care Acquisitions

Ventas Inc., the largest U.S. owner of senior housing and assisted-living facilities, has agreed to acquire its rival, Nationwide Health Properties Inc., for $5.8 billion – the latest and largest biggest deal in a string of acquisitions by publicly traded health-care, real-estate companies in recent times. After this acquisition closes in the third period, Ventas Inc. will own 1,311 properties in 47 states, the District of Columbia, and two Canadian provinces. Their property breaks down into the following categories – senior housing (643), skilled nursing (379), medical facilities (234), hospitals (47), and other (8).

Nationwide

Consumers might wonder where Nationwide Health Properties Inc. made its mistake. After all, if health-care real estate is viable, why didn't this company survive the commercial crisis? Theiler believes that Nationwide did mot market as aggressively as other health-care companies. For example, Ventas has been active in the market. In October, 2010, Ventas acquired the assets of Atria Senior Living. In December, the company made a $6 billion HCP purchase.

Rising Demand

With more people accessing health insurance, the evolving trend towards outpatient facilities, and an aging population, there will be a growing demand for medical-office space.

Other Players

Of course, Ventas Inc. is not the only entity interested in health-care acquisitions. During 2010, health-care companies acquired $11.7 billion in medical-office and senior-living facilities. Following the February 28 announcement by Ventas, Health Care REIT Inc. agreed to acquire almost all of the real-estate assets of Genesis HealthCare, a privately held company based in Kennett Square, Pa., for $2.4 billion. Health-care REITs are not standing on the sidelines because they recognize the market potential of health-care real estate.

Demand for Senior Care Spurs Deals

Do You Expect A Continued High Demand For Health-Care Real Estate?

Image courtesy of hamiltonhospital.org

Feb 24

Real Estate – Driving Factors

by Mary Teresa Fowler
Real Estate Market Driving Forces

The real estate market fluctuates continually and values vary from region to region. Yet one constant remains amidst all this flux and diversity; specific factors drive the real estate market.

These factors have tremendous influence on society. Keep in mind that real estate accounts for a substantial percentage of people's wealth. Almost one-third of the average North American's net worth can be attributed to real estate. The value of the entire market amounts to about $20 trillion. Obviously, real estate is a lucrative market for investors especially in global centers such as New York City and Washington.

Population

The demographics (data describing a population) affect real estate prices and the types of property in demand. Demographics include age, race, gender, income, and migration patterns, as well as population growth. Huge shifts in the demographics of a nation can have a major impact on real estate.

Indeed, significant changes can affect real estate trends for decades. Demographics make a big difference. For example, baby boomers (born between 1946 and 1965) are impacting the market as they start and move forward in retirement.

In this instance, investors are looking at the probable popularity of second homes in vacation hot spots as this group reaches retirement. Will baby boomers prefer smaller homes? After all, their children have flown the nest and they might have to rely more on that nest egg as they live on retirement pensions.

Baby boomers stated to retire in 2010. Yet savvy real estate investors anticipated this shift long before and geared their investment to match the approaching trend. They targeted the types and location of properties of interest to baby boomers.

Rates

Obviously, interest rates drive the real estate market. Rates matter to individuals and the market. When interest rates fall, the cost of a mortgage is lower, and there is a higher demand for real estate. Of course, more demand means increased prices. Rising interest rates will have the opposite effect.

In addition to residential real estate, interest rates affect real estate investment trusts (REITs). When interest rates fall, a bond value increases with the more desirable coupon rate. With falling interest rates, the value of REITs rises and their high yields look attractive to investors.

Economy

No doubt, the economy affects the real estate market. Economic indicators (GDP, employment data, manufacturing activity, prices of goods) are used to measure the economy. The old adage holds much truth – as goes the economy, so goes real estate.

REITs in certain investment areas can suffer during an economic downturn. A REIT centered on hotels might not perform as well in economic turmoil as a REIT focused on office buildings. Hotels are sensitive to economic setbacks because they are considered "short-term leases."

Under economic stress, an entrepreneur might reduce the number of corporate business trips and hotel room rentals. Yet the business owner will still hold on to his office (a longer-term lease). Real estate is sensitive to economic activity.

Check out additional factors that drive the real estate market.

Four key factors that drive the real estate market

Which Factors Do You Think Drive The Real Estate Market?

Image courtesy of landthink.com

Feb 22

Buying a Home – Basic Steps

by Mary Teresa Fowler
Buying a Home - Basic Steps

Buying a home is a big decision and step-by-step process. Real estate agents can handle the details and see if a purchase suits your needs. Yet ultimately, this house will be your home so you should prepare yourself for the process. Be ready to invest the necessary money, time, and effort. The investment is well-worth taking the time to follow a few careful and considered steps.

Decision

Buying a home should not be one of those 'spur of the moment' times in life. These spontaneous times have their place but not when it comes to purchasing a home. A huge commitment requires careful consideration of various issues.

Do you have your finances in order? Can you access the necessary funds for the entire process – down payment, purchase, closing? Can you handle the commitment beyond the closing including maintenance and mortgage payments? The decision to buy a home has to be right for you.

Of course, home ownership has advantages but the buyer has to be able to handle all aspects of the commitment. Home ownership has benefits including building home equity and receiving tax benefits. If buying a home suits you at this time in your life, it has an advantage over renting in that the monthly payment goes towards your mortgage.

Real Estate Agent

A reputable real estate agent will be one of your most valuable resources throughout this process. Choose carefully from excellent sources. Try to find an agent that you feel comfortable working with through these important steps. Actually, finding a real estate agent whom you feel at ease with should not be too much of a problem. Reputable agents will treat you with the utmost professionalism and have your interests as their priority.

They have a valuable and varied role to play in this purchase. Agents will let you know about the market, discover your preferences, and find a property to match your needs. They are familiar with the neighborhoods and prices and have a whole list of professionals they can draw on for any reason. Real estate agents should have expert negotiating skills and be diligent about checking documents and dealing with any issues in a timely manner.

Financing

Buyers must be able to get the necessary financing. In order to receive funding, you have to find a lender, submit an application, and get pre-approval. There are various financial steps to go through before you own your dream home. Figuring out manageable payments and loan options, forwarding an accepted purchase offer contract to your banker, appraisal, title commitment, and money for closing – all are examples of financial-related steps in buying a home.

Pre-approval should be square one for home-buyers

Location

Obviously, you need to have a fixed idea about your preferred neighborhood. You do not need to know from the start about the exact street for your perfect home. Yet you do need to know your general preferences for the area such as near schools or public transporation.

Home Inspection

A home inspection done by a professional who will look for hidden problems in a house is an invaluable service for homeowners. The living room might look fashionable but it will lose its appeal quickly if you move in and discover a faulty foundation. Every step in the home buying process exists for a reason. Don't try to rush, bypass, or ignore any significant details in this monumental purchase – your new home.

Do You Have Any Tips To Offer About Buying A Home?

Image courtesy of realestatecare.co.uk

Feb 19

Real Estate Values - Think Green

by Mary Teresa Fowler
Energy Efficient Home

Doug Overholt of BC (British Columbia) Hydro's Power Smart New Home Program is the latest official to encourage home owners towards energy-efficient products. Overholt points out the benefits of 'green' homes and insists that energy-efficiency is a factor in resale real estate value. The greener the house, the higher the resale value.

Think Green

Of course, saving energy also translates into more comfort, extra savings in the short and long term, and taking care of the environment. The BC Hydro representative makes a point that we discussed here previously at estaterebate.com. Despite the fact that almost everyone understands the benefits of being green, sometimes we get sidetracked with other purchases. Our earlier post referred to them as "eye candy." Several home owners would sooner pay extra for the gorgeous granite countertop than high-performance windows.

Are 'Green' Homes Worth The Price?

Overholt says that green homes are worth the price. He explains how rising energy costs will cause more homeowners in the future to look for energy-efficient homes. Even though if a homeowner makes simple alterations, they can save on energy bills in the meantime.

"Sometimes new home buyers overlook two important aspects of energy efficiency. First, an efficient home is going to cost you less to operate every month. That's money in your pocket - you can pay down your mortgage faster. Second, we live in an era of rising energy costs. Down the road, a house that's an energy pig won't sell as easily, or appreciate as well as one that costs less to operate," says Doug Overholt of BC Hydro's Power Smart New Home Program.

Sometimes people get off track because they think that green homes will cost more. No doubt, certain features such as heat pumps can come with considerable initial cost. Yet these smart purchases pay for themselves with savings in the long term.

Anyway, everything 'energy-efficient' does not have a high price tag. Usually, extra insulation or air sealing will not break your budget. As well, there are energy-efficiency grants out there to help Canadian and American homeowners. With high energy costs and an economy emerging from a downturn, many people need help and providing energy grants goes in the right direction.

Energy-Efficient Programs

Sometimes the programs may not go far enough, however, in the right direction or the path may be too complicated for certain groups. For example, specific programs encourage homeowners to buy energy-efficient products and receive reimbursement from the government. That plan does not always work for families living on low incomes because they cannot pay the upfront cost. That won't be because they are spending it on "eye candy." Their income covers only (or maybe does not even cover) the basics.

Yet everyone should check with state (provincial in Canada) and federal officials to see if there is an energy-efficiency program to suit your needs. Thinking green can save you money today and in the future.

For resale real estate value, think energy efficiency

estaterebate.com has also provided information in another post about Prince William's new 'green' home at Harwood Park Estate. A few interesting green details here! Let us not forget, however, that every family, regardless of income, should be able to live in a comfortable and energy-efficient home.

At Home with Prince William & Kate Middleton

Are You Planning Energy-Efficient Improvements?

Image courtesy of immaterial-labor.com

Feb 17

Hot U.S. Real Estate Markets

by Mary Teresa Fowler
Hot Real Estate Markets

Looking for a hot U.S. real estate market? Everyone is – especially those living through a cold and stormy winter. Buyers in a wintry climate might be looking literally for 'hot' U.S. real estate.

Hot Market

Of course, realtors in sunny climates recognize the plight of winter-weary potential buyers. Savvy real estate agents rev up their advertising campaigns to attract homeowners tired of shovelling snow. So, the 'hot' markets like Florida are popular with U.S. home buyers.

Manhattan Market

Manhattan is a historically-sound and hot real estate market. Even hotel properties are flying off the shelves in New York City. According to a February 16 report by Jones Lang LaSalle Hotels, the Big Apple will see double the volume of hotel deals in 2011. This report does not include the expected volume of residential transactions.

Probably, most people are not surprised about tropical climates and dynamic centers like New York City rating as hot real estate. Yet more than a few buyers are surprised by the Bloomberg News announcement about a very hot U.S. real estate market. After all, not all U.S. regions are in their peak period. One specific sector, however, is doing better than expected as the country comes out of a recession.

Growing Market

According to Bloomberg News, farmland in the middle of the country's agricultural belt is a hot real estate market. On February 15, the Federal Bank Reserve of Kansas City said that fourth quarter farmland prices in the US are up the most in two years. Keep in mind that potential buyers must be interested in these properties considering the effort they make to arrive at auctions.

Bidders will not be flying first-class to a tropical paradise to view this type of real estate. Interested parties will be travelling over snowy and icy roads to look at the properties. Recently, bidders took that trip to bid on one of the most coveted properties in the U.S. Midwest - 120 acres of farmland in Greene County, Iowa.

Winning Bid

The winner of a January auction in Jefferson offered $8,200 an acre (about $1 million) for land in Scranton Township. According to Iowa State University data, that price is 44% higher than the $5,701 per acre estimate for average values in the county. Residential and commercial properties in these areas sell for low prices.

Reason to Bid

Losses of manufacturing jobs have caused economic stress in this region and resulted in a drop in housing prices. Yet farmland is a different story. As commodity prices increase, farmers and investors are bidding at farmland auctions. Farmers are buying for the long term and investors recognize a potential profit.

Rising Values

During 2010, values in Iowa rose 16 per cent. Iowa is the largest corn-and-soybean-growing U.S. state. If commodities stay at current levels, values in Iowa might increase an additional 10 per cent. It looks like more investors might be travelling over icy roads to farmland auctions.

Farmland Boom Provides Boost to Slumping U.S. Midwest Real Estate Market

Would You Be Interested In Buying Farmland In Central USA?

Image couretsy of bloomberg.com

Feb 15

Housing Plan – Will Middle Class Miss Out?

by Mary Teresa Fowler
Obama Mortgage Plan

Congressman Dennis Cardoza (D-Merced) believes that the new proposal from the Obama administration will end the American dream of home ownership for the middle class. The plan points to the eventual end of Fannie Mae and Freddie Mac. Now this initiative does not go into effect tomorrow. The changes have to pass through Congress. Actually, it could take several years for certain modifications to be in place.

Proposed Reform

Cardoza admits that there are problems with both government-sponsored enterprises (GSEs). He would agree to reforming them but opposes eliminating the GSEs. Cordoza insists that Fannie Mae and Freddie Mac have helped a huge percentage of middle class homeowners to buy homes. In fact, he mentions his own state of California, its high housing costs, and the fact that almost every mortgage is backed by the GSEs.

A former realtor, Cardoza points to the pre-Fannie and Freddie days. At that time, homeowners needed a 50% down payment and repayment time was five years on average. Presently, he is seeking support for his own legislation - the Housing Opportunity and Mortgage Equity (HOME) Act, H.R. 363 – a bill capitalizing on market-based solutions to keep people in their homes.

Cardoza is not shy about expressing his opposition to getting rid of Fannie Mae and Freddie Mac. He was invited to speak at a think tank panel discussion - Underwater Housing and Recovery - sponsored by the Third Way. Cardoza'a Congressional district in California's Central Valley is in the midst of a serious housing crisis. Modesto, Stockton, and Merced have some of the highest rates of foreclosures in the country. Three out of five homeowners are 'underwater' carrying loans more than the value of their house.

"In America, homeownership is at the core of middle class prosperity. In fact, it is the American dream. If the government withdraws assistance to the GSEs that make this dream accessible, average working Americans - teacher, plumbers, and journalists - will no longer be able to get a mortgage to buy a home. We will become a rental society, instead of an ownership society." ~ Congressman Dennis Cardoza

Cardoza: President's Plan the "Most Irresponsible Housing Proposal Yet"

Private Sector

More representatives than Cardoza see problems with the GSEs. A few people even hoped that the administration would abolish the GSEs. Yet Obama's latest proposals were still a shock to many individuals and groups. Part of the new proposal plans a housing-finance system that would rely almost exclusively on the private sector.

Currently, Fannie Mae and Freddie Mac back private mortgages. Consumer advocates worry about the proposed changes. If the government does not get behind these mortgages, maybe more lenders could back away, and consumers will have fewer options. Of course, it is not advisable to help people get into houses if they cannot afford a home.

Balanced Approach

The past housing crisis is evidence that a situation can get out of control. Yet government must provide a balanced approach. Often people need a helping hand. There is a promise, however, that this new proposal will not eliminate all help for low-income families. Apparently, there will be programs to help with housing even if they are not the familiar Fannie Mae and Freddie Mac.

Why You Should Buy That Home Now

What Do You Think Of Obama's New Housing Plan?

Image courtesy of stopfreclosure.com

Feb 12

First-Time Home Buyer – Fix Up or Move In

by Mary Teresa Fowler
First Time Home Buyers

Do first-time home buyers prefer to buy a "fixer-upper" or a "ready to move in home?" Obviously, the choice will vary from buyer to buyer. Yet it is an interesting topic to explore on different levels.

Fix Up or Move In

On the average, do today's first-time buyers respond differently than a generation ago? Do urban buyers make different choices than rural buyers? Does modern society encourage home owners to want 'instant' results – the perfect home right from the start – no "fixer-uppers."

Starting Out

The traditional perception of the 'first-time buyer' is the newly-married bride and groom just starting out in life. Of course, in our enlightened world, we don't (or shouldn't) put limits on our definition of couples. Yet still, many of today's first-time home buyers are young couples who are just setting up their first home together. Others might have lived previously in apartments as a family.

First-time home owners, however, are not always couples. Three friends could purchase a home. Individuals could even just pool their resources together and buy a home as an investment. Obviously, people must exert caution in all steps of such a major transaction.

First-Time Home Owner

Regardless, buying a home for the first time is a new and 'starting out' experience – whether you are 20 or 40. Remember that not every first-time home buyer is just a few years out of high school. First-time home owners can be nearer middle age. Many people rent for years before buying that first home. Actually, for the purposes of qualifying for the expired Federal First-Time Home Buyers' Tax Credit, home owners could be real first-timers or people who had not owned a principal residence for three years.

First-Time Survey

The results of a recent Coldwell Banker Real Estate survey shed a little light on the contemporary first-time home buyer. In many housing markets with low prices, first-time buyers can afford to pick and choose, and they do not have to select that home in need of renovation. If prices were higher, maybe first-timers would make a different choice. For example, young families could be carrying a heavy financial load. Probably they would go for the 'fixer-upper' in a market with more expensive houses.

With affordable prices, however, starter homes with imperfections get left behind for a more 'ready to move in' type of home. According to the Coldwell Banker Real Estate survey, first-time buyers are not even searching for homes in need of repair. Eighty-seven percent of home owners who purchased their first home in the past year mentioned that a move-in-ready house had mattered to them.

Almost all of the 300 first-time home owners in the survey said that they had been pleased with the purchase price. The new home owners found that they could stretch their dollar and get a home to suit their lifestyle. Sixty-seven percent said that market conditions allowed them to buy a home sooner than their original expectation.

Half of the home owners found homes in a better neighborhood than they expected and 61% bought a home at a more affordable price. Many home owners (40%) said they got more space for their dollar and 43% of respondents locked in a lower mortgage rate. According to this survey, first-time buyers do not have to fix up before they move into their new homes.

First-time buyers forgo starter homes: survey

Do You Prefer A "Fixer-Upper' Or A "Move-In-Ready" Home?

Image courtesy of house2uonline.com

Feb 10

Sky-High Real Estate

by Mary Teresa Fowler
Sky High Real Estate

This week in real estate news, two stories on the same day (one Canadian, one American) focused on 'sky-high' debt and real estate prices as well as 'high in the sky' connections.

Sky-High Debt

Since 1999, TD Economics has been gathering Canadian data and creating special financial reports. Their latest edition gauges the financial vulnerability of households in regions across Canada. TD organized this report as a response to growing worries about high debt levels and the overall financial state of Canadian households. The index of financial vulnerability measures six key metrics of household financial position.

TD Economics assigned a weight to each metric based on its perceived importance. The metrics include debt-to-income ratio (combined total of mortgages, lines of credit, and additional loans as a percentage of personal disposable income), debt service (percentage of income), and the proportion of households with a debt service ratio of 40% or more. The index is not a predictor. Yet it tries to determine which region would be most vulnerable financially if faced with an economic shock.

The report considers circumstances such as a rise in unemployment or interest rates as well as a housing downturn. The report noted increasing vulnerability across Canada but no sign of a household debt crisis in the future. British Columbia showed as the most vulnerable province in case of economic shock. Actually, this result is not shocking to residents of that province.

British Columbia has been the most vulnerable every year since TD Economics started these reports. Alberta, Ontario, and Saskatchewan are ranked as second, third, and fourth most vulnerable followed by Quebec and the four Atlantic Provinces. Manitoba is the least vulnerable province.

Sky-High Housing Prices

Why is British Columbia the most vulnerable for economic shock?

Sky-high prices are part of the answer to B.C.'s vulnerability. As well, the province's household debt-to-income ratio is 160.5% - way above the Canadian average of 127%. In addition, British Columbia is the only province to have a negative savings rate. Every available dollar is directed toward mortgage, additional debt, or living costs.

B.C. most vulnerable to economic downturn TD report Debt-to-income ratio high

Sky-high real estate makes B.C. most vulnerable to shocks: TD

Sky-High Real Estate Prices

In yet another February 9 news story, there was talk about 'sky-high' real estate prices with a 'high in the sky' connection.

Chesley Sullenberger, the pilot touted as a hero for landing his plane safely on the Hudson River, and his wife, Lorraine, are accusing a bank official and a real estate broker of overinflating a purchase price. In 2002, the couple bought a building in Paradise, Northern California, for $935,000. Sullenberger and his wife claim that the price was far above market value.

The suit requests that the original loan be nullified and the couple reimbursed for alleged overpayments. The real estate broker, Cherie Huillade, claims that the appraisal was an accurate representation. If mediation fails, a trial is set for September.

Hudson pilot Sully sues over real estate deal

Do You Have Any 'Sky-High' Real Estate Stories?

Image courtesy of xhland.net

Feb 8

Real Estate Values – What Do You Value?

by Mary Teresa Fowler
Real Estate Values

Everyone knows that neighborhoods affect real estate values. When it comes to property values, location, location, location, seems to be a true statement. ZIP codes matter in the real estate game.

Positive and Negative Factors

Living close to a beach or residing in the trendy part of town can be considered a plus. Having a home in a flood zone or near major traffic will not be viewed in such a favorable light. The market value of your home will reflect the location. Your neighborhood can affect property values in a positive or negative manner.

Generally, people can agree on whether specific factors are good or bad for real estate values. Usually, the decision does not require much thought. A high crime neighborhood harms real estate values. Being voted 'the city's best neighborhood' would be an asset.

Confusing Factors

Sometimes though it can be difficult to decide whether a factor is a benefit or a detriment to a neighborhood. Even the official spin on the story can be confusing for homeowners. For example, wind turbines are an addition to a neighborhood that can cause intense debate.

Of course, most homeowners will never be faced with decisions about wind turbines in their neighborhood. Yet for those homeowners who encounter this circumstance, the situation can be confusing on many levels. Of course, environmentally-conscious homeowners can recognize the green benefits.

Be Green or Be Gone

Questions surface, however, even for the 'greenest' homeowner. Do I want the wind turbines in my neighborhood? How will they affect the look of the area? How will they affect my property values? On the other hand, isn't a green project a positive development for a neighborhood?

Looking for answers can be as turbulent as the wind itself. Green groups will welcome the development. Other parties will worry about the possibility of the turbines causing harm to birds. Health associations could be concerned about possible health risks associated with living too close to wind turbines.

The municipality in question might be pleased with the extra revenues. The company in charge of the turbines will claim that there is no negative effect on real estate values. Will wind turbines be an advantage or disadvantage to a neighborhood?

Sometimes it is not so easy to figure out how a factor is going to influence a neighborhood. Most likely, a homeowner's individual position will be determined by one's own values and the information at their disposal. People will be forced to debate issues such as green vs. aesthetics, revenues vs. animal protection, and much more.

Real Estate Values

In the meantime, how would wind turbines affect real estate values? The answers to that question are a mixed lot. Yet the National Association of Realtors has recognized that the issue is of utmost importance to many homeowners. The association has organized a wealth of resources on the topic. There were enough wind turbines in operation in the U.S. at the end of 2009 to generate electricity to power 10 million homes.

Field Guide to Wind Farms and their Effect on Property Value

Will Wind Turbines Affect Property Values?

Do You Think Wind Turbines Would Affect Real Estate Values?

Image courtesy of claycreekdecor.com

Feb 5

Commercial Real Estate - Fall or Recover

by Mary Teresa Fowler
Commercial Real Estate Recovery

Industry analysts predicted the collapse of U.S. commercial real estate but it never materialized in reality. Of course, the market is just coming out of an economic downturn. Recently, a Federal Reserve executive told a congressional committee that commercial real estate was close to bottom.

Yet an even greater crisis had been predicted by many observers. It was believed that commercial real estate would fall, drag the economy back to a recession, and cause a catastrophe in the banks. Indeed much to the surprise of many people, commercial real estate is on the rebound.

Overall Recovery

Although the positive trend can be seen across the country, it picks up steam in major centers like New York City. Overall, the commercial real estate market looks promising but there are pockets of distress. As well, the market is far below its 2007 peak.

Underlying market fundamentals are reaching a stabilized state. At the end of 2010, vacancy rates were not increasing in office, industrial, and retail sectors. Although vacancy levels were elevated to varying degrees (13%-16%), sales of commercial real estate improved in every quarter of 2010.

CB Richard Ellis in Los Angeles, the world's largest commercial property brokerage, reported double-digit fourth-quarter gains in all its global business lines except real estate development services. Bricks & Mortar Capital President, Craig Silvers, explained that improving economies in the United States and Asia have more companies taking action on real estate matters. In fact, Silvers suggests that companies are trying to "lock in real estate leases or buy property before prices get out of control."

Commercial real estate due for upswing?

Financial Stress

If lenders concentrated their efforts in commercial real estate, they may feel more than a little stress. Keep in mind that $3.4 trillion is outstanding on real estate loans. Plenty of defaults will mean a ton of foreclosures. Almost 1,300 small banks nationwide hold a considerable number of commercial real estate loans.

Yet a top Federal Reserve official, Patrick Parkinson, played down any worries. He believes that bank struggles will not be as grave as earlier predictions. Commercial real estate will not be the downfall of U.S. banks.

Future Issues

It is possible though that there could be difficulties in the future. Present loans will mature and need rolling over, therefore, putting banks under strain. Most commercial mortgages have shorter maturities (three-ten years) than those offered by banks for residential loans. In addition, commercial loans are structured so that they are 'rolled over' instead of being repaid during the life of the agreement.

No Threat

Commercial loans are not a huge threat to big banks. No doubt, the market is dragging a little. A few financial institutions hold large portfolios of mortgage-backed securities. Yet already, they have taken huge write-downs on them.

"While we expect significant ongoing CRE-related problems, it appears that worst-case scenarios are becoming increasingly unlikely," says Patrick Parkinson, the Federal Director of banking supervision and regulation.

U.S. Commercial Property Recovery Spares Economy

UPDATE 2-US commercial property loans a drag, not huge threat

Do You Have Confidence In The U.S. Commercial Real Estate Market?

Image courtesy of onesourcemetro.com

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