Lack of credit, anemic job growth and a high level of uncertainty have lead to choppy markets in 2010. Values rallied early in the year only to pull back by mid-year as the anticipated economic recovery failed to materialize. In the first quarter investors expected the recovering economy would begin to improve fundamentals in the second half. But as economic growth slowed to a crawl, commercial real estate values have pulled back as of mid year. According to Moodys/REAL Commercial Property Price Index, pricing had improved nationwide by 8.6 % from their October 2009 lows, but by mid year had pulled back to a modest 4.2% improvement. The index reported that even after rallying in the first quarter pricing was off .9% for the first half  leaving the market 41.4% below the peak level realized in October 2007.

Nonetheless market activity is up markedly. According to Real Capital Analytics July volume was more than double the prior year level. However the bulk of the activity has been in core assets in primary and major markets. Value added investments particularly in secondary markets still struggle to find a market.

While strong investor demand for the best assets has begun to create greater transparency and pricing clarity, the overhang of distressed property is keeping a lid on prices and putting downward pressure on values. This will likely play out over the coming months if not years. As markets and values improve, banks which have been reluctant and patient sellers will begin to unload or otherwise force the sale of REO or underwater property. It doesn’t appear that the wave of distressed property sales will push the market below the prior lows, but rather the assets will be sold into any meaningful uptick. This unwinding process will create opportunities for investors to buy on the dips as the market takes a crooked stair step to recovery.

Our view is that, while choppy, the commercial real estate market is on a positive mid-term ascent. After the November elections as economic policy clarity improves, new confidence will return and job growth will follow. We would expect to see strengthening tenant demand by year-end and through 2011-2013.  In this early and still uncertain stage of the recovery it remains an opportune time for both tenants and investors to lock in long-term values.

-Jeffrey Finn

Jeffrey M. Finn is the President and CEO of NAI Global, the premier managed network of commercial real estate firms and one of the largest real estate services providers worldwide.