By Paul Davidson, USA TODAY

The once-dismal commercial real estate market is turning around far more quickly than analysts expected, with troubled loans falling, occupancy rising and office building sales surging in the largest markets.

That’s welcome news for an economic recovery that still faces headwinds such as rising oil prices. The improving market has eased fears that banks might be crippled by heavy losses from their bad construction loans in the mid-2000s and would have to rein in lending just as credit is easing.

Lenders were still saddled with $181 billion in distressed loans in February, according to Real Capital Analytics (RCA). But that’s down from $188 billion in September. Mortgage defaults for office, retail and industrial building loans dipped for the first time since 2005 in the fourth quarter, to 4.28% from 4.36%. They should fall further this year, says RCA economist Sam Chandan. “Worst-case scenarios have been avoided,” he says.

The recovery, he says, has finally stabilized building occupancy, letting landlords pay down loans. Vacancy rates in the first quarter dipped slightly for retail and industrial properties, to 7.2% and 10%, respectively, and were unchanged at 13.4% for offices, according to CoStar Group. Occupancy has edged up steadily since early last year.

Investors, meanwhile, are clamoring to buy well-leased office buildings in markets such as New York City and Washington, D.C. A big reason: virtually no new development the past few years.

In New York, “We’re seeing prices (for prized buildings) return to 2007 levels” after falling 40% in the downturn, says Richard Baxter, vice chairman of real estate giant Jones Lang LaSalle.

New York’s biggest office landlord, SL Green Realty, has been scooping up buildings. Co-Chief Investment Officer Isaac Zion says credit is available, occupancy and lease rates are up and returns far exceed meager bond yields. “We really saw the writing on the wall and we pounced,” Zion says.

Commercial mortgage-backed securities, a big funding source for some buyers, are up this year.

More foreclosures are still likely to batter prices in many areas. But the investment furor could spread to cities such as Dallas, Denver and Houston, says CoStar real estate strategist Chris Macke.

Rising prices could at least temper foreclosures on the $1.4 trillion in commercial mortgages that Deutsche Bank says are maturing by 2013. Even owners still making payments might not be able to refinance properties whose values fell sharply.

Jul 13, 2010 8:34 AM, By Victor Calanog, Contributing Columnist

When will the retail sector recover? The answer depends on how recovery is defined. Property owners consider a drop in vacancies and a reversal from negative to positive rent growth as the first signs of a recovery. Some investors define recovery as the point at which rents return to their previous peak levels. For investors and researchers who focus on transaction prices, the sector won’t fully recover until property values creep up to pre-2008 levels.

Preliminary second-quarter data from Reis offers some insight as to where the U.S. economy might be in the business cycle, given these different definitions of recovery. Investors should expect retail rents and occupancies to continue to slide for the next four to six quarters, with vacancies stabilizing and rent growth turning positive sometime in late 2011 or early 2012.

Effective rents nationally will not recover to peak levels reached in 2008 until approximately 2016. Property values may not return to 2007 levels until after 2016, despite news over the past six months of a sliver of stabilized, Class-A properties selling at capitalization rates unseen since 2006.

Thursday, July 15, 2010, by Dakota

Remember two years ago when developer Bond Cos was going to put up a big mixed-use housing and retail project on the site of the Little Joe’s Restaurant in Chinatown? A Community Redevelopment Agency project, the whole development disappeared after Bond Cos filed for bankruptcy on the project in 2009. Well, old friend Blossom is coming back around. Two weeks ago, the City Council voted to purchase the site, which is currently owned by lender Prime Property Fund, and this morning, the Community Redevelopment Agency voted to back the deal. The site will be purchased for a $9.9 million, funded through CRA funds, federal transportation grant programs, and other funds. Requests for proposals from developers are now being sent out.

May 21, 2010 11:11 AM, By Denise Kalette, NREI Managing Editor

Apartment owners got a taste of encouraging news in the first quarter, as vacancy rates for all rental buildings with at least five units declined to 12.1% from 12.5% in the previous quarter, according a National Multi-Housing Council (NMHC) report released Thursday. For investment-grade apartments, the national vacancy rate dropped to 7.2% from 8.2% in the prior quarter. That’s the lowest level for the first quarter vacancy rate since late 2008, NMHC notes.

The declines occurred across the country, leaving the Northeast with the lowest vacancy level, 5%, and the South with the highest, 8.9%. Since the recession began in December 2007, the South and West have experienced the steepest rise in vacancy levels, according to NMHC. The results echo a survey released several days earlier by NMHC, which showed widespread gains in the apartment market. “There is clear improvement in apartment market conditions on all fronts,” notes Mark Obrinsky, NMHC Chief Economist, with regard to the survey.

“Even so, a sustained recovery in the apartment market needs a firm economic and demographic foundation,” says Obrinsky. “While the long-term prospects for the industry are bright, in the near-term the industry’s prospects still depend upon a stronger rebound in both the job market and household formation.” Net absorption of investment-grade apartments in the first quarter rose to 21,369, up 5,785 from the previous quarter and up 58,333 from a year earlier. That’s the best first quarter performance for absorptions in a decade, NMHC reports.

Meanwhile, investment-quality completions dropped to 22,210, down 6,481 from a year earlier. The decline reflects a sharp decrease in new starts that have shrunk the new supply.

Still, rent growth remained weak or negative in the first quarter, according to NMHC. Rents declined throughout the country for the fifth consecutive quarter. Rents for professionally managed apartments tracked by MPF Research dropped 3.1% in the first quarter. The sharpest declines in rent growth occurred in the West, 4.5%, and in the South, 3%.

SALE VOLUME DROPS

With regard to transactions, sales volume dropped in the first quarter to $4.3 billion, a decline of 19.4% from the previous quarter among properties tracked by New York-based research firm Real Capital Analytics. The transaction volume, however, was still far higher than in the doldrums of 2009, and represented an increase of 88.8% from the same period last year.

Although the volume of deals declined on a quarterly basis, prices rose substantially, reaching an average of $114,618 per apartment. That was an increase of 31.5% from the previous quarter and 32.4% from 2009, NMHC reports. The bolstered prices represent a return to pre-recession levels, the trade group reports.

However, the market value of investment-grade apartments in the National Council of Real Estate Fiduciaries (NCREIF) database declined in the fourth quarter. It fell 1.0% from the previous quarter and 14.2% from a year ago, according to NCREIF.

Want to invest in Multi-Family Real Estate?

Apr 30, 2010 7:40 PM, By Joe Caton, NREI

Not only have signs of life returned to commercial real estate finance, but there are also signs that the capital markets are on the mend. As 2010 began, analysts called for about $20 billion in new issuance of commercial mortgage-backed securities (CMBS). But by the beginning of the second quarter, those estimates rose to $25 billion, and may rise even further.

CMBS issuance is a major barometer of real estate finance because it is one of the most orderly and low-cost funding sources available. With the winding down of the Term Asset-Backed Loan Facility over the next two months, investors are looking to CMBS for stable government-free opportunities.

In 2009, Glimcher Realty Trust struggled to refinance a number of its shopping centers in Tennessee and Ohio. Recently it received a $100 million loan package and will sell its refinanced loans into the CMBS market.

In addition to well-received CMBS issues by Wells Fargo’s Wachovia unit and Bank of America’s Merrill Lynch unit, Dutch property investment fund, Vesteda, launched a $471 million CMBS issue. With this transaction the Dutch market reopened to its first issuance since virtually shutting down in 2007.

Fear dissipates

Many investors are no longer fearful of losses from souring real estate-backed investments or rising interest rates, and now have an insatiable appetite for higher yields. Greed has replaced fear as the main motivator for property investors and the keepers of the lending purse.

Commercial real estate values have edged up 6% in the last four months, according to Real Capital Analytics, after falling a whopping 45% from 2007 to 2009. With asset managers, including special servicers, working overtime to work out troubled loans, the window may be closing for investors hoping to find steep discounted deals.

The latest buzz phrase among scavenger investors and the sales representatives they engage is “off-market transactions”, or distressed properties and notes that haven’t been shopped around. Investors are now frantically seeking these transactions, and even have multiple solicitation postings on social networking sites.

As a sign that lenders are salivating over a faster market recovery, Los Angeles-based private equity real estate firm Mesa West Capital recently provided a $44 million, five-year first mortgage to CB Richard Ellis Investors. The property is 500 North Brand Boulevard, a 22-story, 420,000 sq. ft. office building in Glendale, Calif. One year ago, this loan would have been unthinkable.

CB Richard Ellis Investors bought the property for $71 million in cash more than a year ago. Not only was the building just 75% occupied at the closing of the loan, but Mesa West Capital (a short-term, high-yield lender) also will allow the borrower to prepay the loan after just two years, anticipating that the borrower will find a lower-cost refinancing package such as a CMBS loan.

Want to buy Commercial Real Estate?

Apr 21, 2010 2:15 PM, NREI staff report

A new survey finds that most commercial real estate investors perceive the U.S. market as at or near the bottom, according to Colliers International’s 2010 Global Investor Sentiment Survey. The majority of respondents to the survey, which was released last week, pegged the recovery at 6 o’clock on the “global property clock.”

The global property clock equates market cycles to specific times, with 12 o’clock representing the top of the market and six o’clock representing the bottom. Each six-hour period in between designates rising (after 6:00 to 12:00) or declining (after 12:00 to 6:00) cycles.

Real estate investors worldwide are painting a more optimistic picture of the market, with many convinced that the next up cycle will begin in the year ahead. That optimism is reflected by two out of three respondents who expressed a desire to expand their portfolios over the next 12 months.

Overall, findings from the survey — tabulated from 244 major institutional and private global investors with a total investment portfolio exceeding $300 billion — note that a majority of respondents believe the market is at or near bottom and the largest two groups, 41%, see the market between five and six o’clock.

“Investors clearly see the market resetting overall and about to enter the next up cycle. In the U.S., the market is about to hit the reset phase,” said Dylan Taylor, Colliers International’s incumbent CEO in the U.S. In late April, Colliers International will formally merge with FirstService Real Estate Advisors.

Respondents view Latin America (8:30) and the Pacific region (7:00) as already on the upswing. The Pacific region includes Australia and New Zealand. Like the U.S., Asia is at 6:00 o’clock, viewed as at the market’s bottom, while the Middle East, Eastern and Western Europe, and Canada were all still viewed as in the down part of the cycle. With the exception of Eastern Europe, respondents believe all of these areas of the world will be in various stages of the up phase of the market in the next 12 months.

While those seeking to expand their portfolios expressed a higher comfort level doing so in their home markets, they also saw future opportunity in several emerging markets, such as Poland, Ukraine, Vietnam, Brazil and India.

“Despite this overwhelmingly positive outlook, investors are still cautious and expressed some areas of concern,” said Taylor.

One of those major concerns is financing. Respondents were evenly split on whether financing is more or less accessible today than it was one year ago. However, their optimism shined through once again when taking a look at the year ahead. Nearly 90% of respondents believe that financing will be easier to secure within the next 12 months. Most, however, thought the cost of financing would increase.

Although investors in the U.S. and the Pacific region saw no change, investors from Asia, Canada, Latin America and Western Europe indicated an improvement in access to financing over the last year. Investors in the Middle East and Eastern Europe saw less availability to financing.

Another theme running through the survey was a shifting preference towards high-quality and income-producing properties. The move back toward income and less emphasis on capital appreciation was best captured by the sentiment from one survey respondent who said, “capital gains are just a bonus; we buy property for income.”

On the capital markets side, the survey results also revealed a considerable divergence of opinion regarding the market’s return to normal (defined as 7% to 7.5% capitalization rates for office product), although most respondents anticipate that their respective markets will return to normal within the next 18 months.

On a geographic basis, U.S. investors expect to see the domestic market return to normal by the second quarter of 2011, a slight lag behind other regions globally. Investors in Asia and the Pacific expect a return to normal by the fourth quarter of 2010, followed by those in Canada, Latin America, Eastern Europe and Western Europe by the first quarter of 2011.

Another important conclusion to be drawn from the survey is the perception of how the market has changed structurally, according to Ross Moore, executive vice president and director of market and economic research for Colliers International.

“Many investors expressed the view that real estate cycles are now shorter and more severe than historical norms, which serves as a warning to others that going forward, market participants will need to be more nimble,” adds Moore. “Access to current and insightful analysis will be more important than ever.”

Want to invest in Commercial Real Estate?

Apr 13, 2010 11:01 AM, By Victor Calanog, contributing columnist, NREI

By Ben Rooney, staff reporterApril 14, 2010: 6:48 AM ET

NEW YORK (CNNMoney.com) — Morgan Stanley has told investors that its real estate fund may suffer a $5.4 billion loss on bad bets in the commercial property market, according to a report published Wednesday.

The loss would be the largest in the history of private-equity real-estate investing, according to the Wall Street Journal, which cited fund documents. The newspaper said the $8.8 billion fund, known as Morgan Stanley Real Estate Funds, or Msref, had been one of the biggest buyers of property around the world over the last two decades.

The fund had done about $174 billion in deals since 1991, the Journal said, mostly with money raised from pension funds, college endowments and foreign investors. The losses stem from soured investments in properties such as the European Central Bank’s Frankfurt headquarters, a big development project in Tokyo and InterContinental hotels across Europe, according to the report.

Morgan Stanley is working to renegotiate its ties to the money-losing investments, but the bank is unable to walk away from many of the deals, the report said. The bank has sought to launch a new, $10 billion fund, Msref VII Global, according to the report. But the weak economy and losses in the real estate market have made it difficult to attract investors.

The report said a Morgan Stanley spokeswoman declined to comment about the losses, but stressed that the bank has a long-term approach to the real estate market.

By Jim Wasserman, jwasserman@sacbee.com
Published: Friday, Apr. 9, 2010 – 12:00 am | Page 1A

Tax relief is on the way for thousands of fearful California mortgage borrowers. Most no longer face a double whammy of losing their homes – and then paying a big state tax bill on the forgiven debt.

State lawmakers Thursday passed SB 401, a bill by Sen. Lois Wolk, D-Davis, to exempt borrowers who lost homes to foreclosure or short sales in 2009 from state taxes that can run into thousands of dollars. The same is true for certain types of loan modifications.

State tax officials say 100,000 people statewide will be spared paying tax they otherwise would owe.

A spokesman for Gov. Arnold Schwarzenegger said he will sign the bill.

Here’s what it does:

SB 401 aligns much of California’s tax code with that used by the Internal Revenue Service nationally. The U.S. government has banned the IRS from taxing forgiven mortgage debt as extra household income from 2007 through the end of 2012. California did the same for the 2007 and 2008 tax years.

The bill extends the state ban from 2009 through the end of 2012. It also bans state taxes on federal stimulus grants for renewable energy projects.

“It will be great for everybody in my situation. This is a big, big relief,” said Sara Palasch, who sold her Bakersfield house through a short sale last year and now lives in Georgia. Weeks ago, she got a state tax bill for $10,500.

Also relieved is Debbie Wong of Sacramento, who received a state tax bill for $7,500. She sold her Elk Grove condo last year through a short sale. The forgiven debt gave her a state taxable income of $108,000 when her salary was $13,000, she said.

“I don’t have the $7,500,” she said Thursday.

Who is affected:

Primarily, the bill affects people who had debt forgiven as they lost homes in foreclosures, short sales and deeds in lieu of foreclosure last year – and through 2012 now. Also affected: those who got loan modifications that cut the amount they owe the bank.

In short sales, a bank might accept a sales price of $250,000 when it is still owed $350,000 on the home. In deeds in lieu of foreclosure, the bank simply takes back the house and may forgive what’s still owed. The difference is the forgiven debt. Borrowers can avoid state taxes on up to $500,000 in forgiven debt.

The Franchise Tax Board says the tax forgiveness measure mostly applies to people who refinanced their homes to get better interest rates or extract equity, and then had a short sale or foreclosure where debt was forgiven.

But the tax board also warned that refinanced dollars taken out as cash and spent on items other than home improvements may be taxable.

Who is not affected:

Those who bought houses and never refinanced before doing a short sale, loan modification or foreclosure are unaffected. In most cases the banks just take back the houses. There is no forgiven debt, and no tax bill, said the tax board.

Investors are also unaffected. They still must pay state taxes on forgiven debt. The bill affects only people who live in their home.

What people should do now when filing their taxes:

The Franchise Tax Board says: “Once the governor signs this into law, California taxpayers will not have to do anything. If they qualify for federal relief on the mortgage debt forgiven, then they will also qualify for state income tax purposes. California Form 540 starts with federal adjusted gross income so there will be no adjustment necessary to properly reflect the state adjusted gross income amount for this issue.”

What this will cost the state:

The tax board estimates it will collect about $34 million less in taxes as a result of the bill in this and coming years. The bill will grant relief to about 100,000 taxpayers statewide from now through 2012, agency spokeswoman Brenda Voet said Thursday. The tax board couldn’t estimate Thursday how many of those would be in the Sacramento region.

Want to learn about Short Sales?

By Les Christie, staff writer April 8, 2010: 1:30 PM ET

NEW YORK (CNNMoney.com) — Did you lose your house to foreclosure this year? Did your lender forgive some of your mortgage debt because you sold it for less than it was worth? If so, you could be facing a big tax hit.

It is IRS policy to tax forgiven debt you are personally responsible for as if it is income. Say, for example, your credit card company settled a $10,000 debt for 50 cents on the dollar. You’d have a debt forgiveness of $5,000, which the IRS would count as income, just like your wages.

The same policy held true for most mortgage debt until 2007, when Congress passed the Mortgage Forgiveness Debt Act. That ended the liability for many homeowners — but not all.

In general, if you lose your home to foreclosure or short sale, where you sell your home for less than you owe, the IRS won’t add insult to injury by counting the difference as income. At least until 2012.

There are four major exceptions to the rule:

1. You did a cash-out refinance and splurged.

Many homeowners took cash out when they refinanced their homes and used the extra dough to pay for new cars, boats or vacations. Say you did that and then got into trouble, losing the house through a foreclosure or short sale. Even if your lender waived the remaining debt, the IRS will treat as income the portion of the forgiven debt that you took out as cash and spent. Only the funds used to actually improve your home won’t be taxed. Yes, even if you spent the money on paying off your student loans or credit cards.

The IRS’ reasoning is that only the money spent on home improvement actually added to your home’s value. And that, presumably, diminished the difference between what you owed on your mortgage and the value of your home when it was foreclosed.

Beware: Some lenders made refinancing offers contingent on homeowners paying off credit card debt, according to Kent Anderson, a Eugene, Ore.-based attorney and tax expert. If you took one of those deals, the refinance money will be reported to the IRS and you will owe taxes on it.

2. You have a home-equity line of credit.

During the boom years, many homeowners tapped soaring home equity to make all sorts of consumer purchases. But the same rules that apply to refinancings also apply to home-equity loans: The IRS will only forgive the tax liability if the loan money was spent improving your home. And, tax experts advise, you’ll need to show receipts to prove you did.

3. You lost your vacation home or investment property.

So the market tanked and you lost your vacation home. Unfortunately, if you didn’t use it as your primary residence for at least two of the previous five years, you’re going to pay the tax man.

More common, however, may be the case of investment properties gone sour. During the housing boom, buying homes for investment purposes soared, accounting for 28% of all sales during 2005, according to the National Association of Realtors. (Vacation homes made up 12%.) And many of these purchases were made with little down payment.

When the bust hit, second home prices cratered. The median price paid for investment properties fell 43% to $105,000 in 2009, from $183,500 in 2005, according to NAR. For vacation homes, the median price paid dropped 17% to $169,000.

If an investor bought a property in 2005 at the median price and sold it in 2009, he could have run up $75,000 or so in forgiven debt. If the investor is in the 25% income tax bracket, that would add nearly $19,000 to their tax liability. Ouch!

4. You owned a multi-million-dollar home.

It may be hard for Americans struggling in this weak economy to sympathize with anyone wealthy enough, at one time, to afford a multi-million-dollar home. But owners losing one could be on the hook for a huge tax bill.

Only the first $2 million in forgiven debt will be voided under the relief act; all the overage is taxable as income.

So, say, for example, you’re Scarlett Johansson. You paid $7 million for your Hollywood Hills villa in 2007. (With a 100% mortgage; this is hypothetical, remember.) But now, you have it on the market for $4.59 million.

Say you can’t unload it, your movies tank and you have to a short sale. (Hey, it happened to Nicholas Cage; he went into foreclosure.) If you sell it for $4 million, leaving a $3 million balance, the IRS would forgive the first $2 million. But the remaining million? You better hope you have a good accountant and a lot of deductions.

The good news? Even if you fall under any of these four scenarios, you may have a way out, according to Anderson. “If the taxpayer was insolvent at the time of the foreclosure, the forgiven debt can be excluded for tax purposes,” he said. “It can also be discharged in a bankruptcy and approved by court order.”

And then there is California
While most states follow the IRS lead and don’t tax most forgiven mortgage debt, California still makes you pay. The state legislature hopes to change that before April 15, but right now California taxpayers are legally liable for paying state income taxes on forgiven mortgage debt.

The state, which has endured some of the worst price declines and foreclosure rates in the nation, did follow the federal lead when it passed the original debt forgiveness bill, but the state only authorized the relief for the 2007 and 2008 tax years. There have been successive legislative efforts to extend relief through 2009, but none have succeeded.

One attempt at passing an omnibus “conformity” bill resulted in a veto by Gov. Schwarzenegger for reasons having nothing to do with mortgage debt forgiveness. The governor objected to a different provision covering erroneous tax reporting by businesses.

Confusion and anxiety is running high, according to Rocky Rushing, chief of staff for democratic state Sen. Ron Calderon, who is spearheading new legislation. His office has fielded many calls from unhappy taxpayers.

“We’ve heard about tax bills in the thousands of dollars,” he said