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.

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.

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.

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?

NEW YORK (CNNMoney.com) — New home construction skyrocketed 40.9% in April compared to last year, according to a government report released Tuesday. Housing starts increased to a seasonally-adjusted annual rate of 672,000 last month, the Commerce Department said. That was a 5.8% rise over March 2010. Economists were expecting housing starts to jump to 655,000.

New construction of single-family homes, the key sector of the housing market, rose 10.2% over the month to an annual rate of 593,000. New construction of multi-family homes — buildings with 5 or more units — was 68,000. April was the last month in which sales to first-time home buyers could qualify for a federal tax credit of up to $8,000. Earlier this year lawmakers extended the deadline through April 30 and added a new credit of up to $6,500 for some existing home owners who move.

“The increase in demand prompted by the tax credit has lifted construction,” wrote Ian Shepherdson, economist at High Frequency Economics, in a research note. “But the expiration of the credit … has made homebuilders wary about continuing to add new homes during the summer,” he said.

BUILDING PERMITS
That’s probably why applications for building permits, a gauge of future construction activity, sank in April. Permits fell to a seasonally adjusted annual rate of 606,000 last month, down 11.5% from a revised 685,000 in March. Economists were expecting 680,000 permits. But despite this month’s sharp drop, permits were still up 15.9% from April 2009. “In the near-term the drop in permits clearly signals falling starts ahead,” Shepherdson wrote.

Want to buy a new home?

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?

NEW YORK (CNNMoney.com) — Foreclosure filings declined in more than half of the country’s worst-hit spots in the first three months of 2010. But that doesn’t mean the healing has begun.

In a release issued Thursday, RealtyTrac, a leading online marketer of foreclosed homes, reported that foreclosure filings declined in 14 of the top 20 cities year-over-year, most of which are concentrated in the Sunbelt “bubble” states of California, Arizona, Florida and Nevada.

But the improvement during the first quarter, compared with 12 months earlier, may have been a statistical glitch, not evidence of a real trend. “The decreasing foreclosure activity in some of the nation’s top foreclosure hot spots in the first quarter is not a sure signal that those areas are out of the woods yet,” said RealtyTrac CEO James Saccacio.

Plus, those improvements bucked the market’s general trend: Nationwide foreclosures rose 16% during the quarter.  Saccacio attributed much of the improvement to government-led foreclosure prevention programs, especially a new program encouraging banks to facilitate short sales. Those are transactions in which sellers, with lender approval, sell their homes to third parties for less than what they owe on the mortgage.

Banks have figured out that short sales are less costly to them than foreclosures because they save on a long list of expenses, including legal fees, taxes and maintenance, and brokers’ commissions. “Lenders take about twice the hit on a foreclosure as on a sort sale,” said Rick Sharga, a RealtyTrac spokesman.

Hardest Hit Markets
California cities accounted for half of the top 20 metro areas for foreclosure filings, but Las Vegas claimed the number one position. It had one foreclosure filing for every 28 households during the quarter, roughly five times the national average of one filing for every 128.

The Sin City news is a mixed bag: Filings are 13% worse than in the last three months of 2009, but 19% better than in the first three months of 2009. The second hardest hit metro area was Modesto, Calif., with a rate of one filing for every 34 homes, down more than 13% year-over-year. Cape Coral, Fla., was third, with one in 35, down 26% year-over year. Tied for fourth at one for every 36 homes were Riverside, Calif., (down 19%) and Stockton, Calif., (down 25%).

Los Angeles, the nation’s second largest metro area, recorded 59,293 filings during the quarter, more than any other metro area, but its rate of one for every 75 households made it only the 32nd hardest hit U.S. market.  Miami had the steepest year-over-year increase for any top 20 market. There were over 71% more filings during the first quarter of 2010 than it recorded during the same quarter in 2009.

Want to learn about Foreclosure Alternatives?

On April 5, 2010, the Federal Government’s new short sale guidelines known as Home Affordable Foreclosure Avoidance Program (HAFA) went into effect. These new guidelines, once implemented, will have a huge impact on Ventura County’s real estate market. The Federal Government’s goal is to streamline the incredibly cumbersome short sale process for both home sellers and home buyers. As a Realtor in Ventura County who has represented home buyers and home sellers in the short sale process, I find it hard to fully express my relief when I consider the new HAFA short sale guidelines. As noted below, not all short sales qualify for the HAFA program, so please review the qualification requirements and program guidelines below.

HAFA Qualification Requirements:
Borrowers may be qualified for the HAFA program if they meet any of the following criteria:

1- The home is the borrowers primary residence.

2- The mortgage is the first lien holder and was obtained on or before January 1st, 2009.

3- The homeowner’s total monthly mortgage payment is more than 31% of the homeowner’s gross income.

4- Homeowners who qualify for the Federal Government’s Home Affordable Modification Program (HAMP) but, cannot meet HAMP’s trial period plan requirements.

5- Homeowners who do not successfully complete the HAMP’s trial period plan.

6- Homeowners who during the HAMP modification trial miss at least 2 consecutive mortgage payments.

7- Homeowners who request a short sale.

8- The homeowner’s loan is not guaranteed or owned by Freddie Mac or Fannie Mae.

HAFA Guidelines:
1- Requires each servicer participating in this program to create their own policy, procedure, and process. This means each lender will have a different set of short sale procedures for borrowers to follow.

2- Under the new short sale guidelines home seller can obtain a pre-approved short sale term and an approved sales price from their lender before listing their house for sale.

3- Once a homeowner has received the pre-approved short sale term, the lender will give the homeowner 120 days to sell the property. However, if the homeowner is unable to sell the property within this time frame an extension can be obtained from the homeowners lender.

4- Within 3 business days of receiving an offer the homeowner must send the offer, Request to Approve a Short Sale form, and the home buyer’s pre-qualification letter.

5- Upon receiving the above documents, the lender has 10 business days to approve the short sale. The lender will approve the offer only if the offer is within the terms and conditions of the Short Sale Agreement they originally released to the seller (see #1).

6- Upon a successful sale of the property, the home seller will receive $3000 for relocation expenses. The lender will also receive $1,500 for processing costs.

7- After the sale of the property the borrower is fully released from all liabilities for the first mortgage and second lien holder (if any). The liability towards the second lien holder is released only if the second has received an incentive under HAFA.

Time line

The new short sale guidelines started April 5, 2010 and will end December 31, 2012. Although HAFA is giving some incentives to mortgage servicers and junior lien holders, it will be interesting to see if these institutions will implement the new short sale guidelines. I don’t want to sound pessimistic, however, I can’t help but wonder if the lenders’ incentives are sufficient to cause the lenders to hire more able bodies for this new, fast-paced, short sale turn around. Time will tell if HAFA’s new stipulated short sale rules will actually help Ventura County’s real estate. I will keep you posted as usual.

Want to find out more about the Home Affordable Foreclosure Alternatives Program?

NEW YORK (CNNMoney.com) — If you’re delinquent on your mortgage, your credit score will suffer. Everyone knows that. The question is, by how much?

Until recently, those answers were hard to come by. Credit bureaus were uncommunicative about expressing, in points, just how much impact different foreclosure types of mortgage delinquencies have on scores.

Recently, Fair Isaac, which developed FICO scores, pulled back the curtain a bit, revealing some estimates of point-score declines following mortgage delinquency problems.

Here are the average hit your credit will take:
30 days late: 40 – 110 points
90 days late: 70 – 135 points
Foreclosure, short sale or deed-in-lieu: 85 – 160
Bankruptcy: 130 – 240

To come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a fair-to-middling score of 680 and the other with a very good one of 780. (FICO scores range from 300 to 850.)

The hypothetical person with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records.

“The lending industry tends to regard an account differently when it has become 90 or more days late,” he said, “The likelihood that consumers will resume paying their overdue obligations drops off significantly after the delinquencies have reached 90 days.”

One reason credit companies were so closed-mouthed is that they often can’t definitively state how much each delinquencies will affect scores because there are too many variables.

Some borrowers will fall much more steeply than others for the same payment problem, according to Maxine Sweet, vice president for public education at Experian, one of the nation’s main credit bureaus.

“If you picture someone who has just one mortgage and one other credit account versus a mature credit user like me with 15 accounts, if they miss one payment that would impact their scores a lot more,” she said. “For me, one missed payment would just be a blip.”

The point loss also depends on the borrower’s starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.

Mortgage borrowers can lose their homes three basic ways: a foreclosure; a short sale, where the home is sold for less than than is owed and the bank (generally) forgives the difference; or a deed-in-lieu, in which the borrower gives back the property and the bank again forgives any unpaid balance.

Sweet said credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important factor, she said, is that “it’s reported that you paid less on a settled account.”

Some borrowers may think that because they never missed a payment, they can “walk away” from their homes with relatively little impact on scores. Not true. “When a deed-in-lieu or short sale is reported as a partial payment, it’s treated as a serious delinquency,” Watts said, “just like a foreclosure.”

Even if borrowers made payments faithfully for years before short selling or doing a deed-in-lieu, their credit score will still take a hit. The total decline will run about 85 points for the 680 score borrower to as much as 160 for the 780 score.

Mortgage debt, combined with other financial problems, can send borrowers into bankruptcy, the worst thing that can happen to your credit score.

The effects are long-lasting, according to Sweet. In a Chapter 13 bankruptcy, which involves partial repayment over several years, the stain will take seven years to remove. A Chapter 7 bankruptcy, which involves liquidation, takes 10 years to get over.

Want to learn more about Short Sales or Foreclosures?