A review of recent macroeconomic data on the Corporate Real Estate (CRE) front provides for substantially mixed news regarding value trends.

First the Good News: After losing roughly 1/3 of their value since 2008, commercial real estate prices increased 2.2% in the second quarter, marking the first gain in more than two years as measured by the Investment Property Databank US Quarterly Property Index.

Investment conditions ratings for the institutional apartment and central business district office sectors each increased during second quarter 2010, according to Real Estate Research Corporation.  The tightening of lending standards in the single-family arena is seen as a strengthening development for the apartment sector.  The desire to minimize risk appears to be part of the draw of the office market, according to RERC analysis.

Recent office condominium sales have been to foreign buyers based in Asia, where economies are strong. The quality of the Feng Shui design of these buildings has reportedly been a driving factor in some of these sales.

With a bidding war prevailing for Boston’s John Hancock Tower, some see this as a signal of a possible resurgence in the market for the more predictable returns generated by trophy properties. With supply of these properties limited by a lack of construction funds, relative demand may be increasing.

Now the bad news: Excess inventory created by the CRE bubble of 2005-2007 has been accompanied by a decrease in demand amongst prospective tenants. Concerns over the economic recovery as well as high unemployment levels continue to weigh down commercial real estate prices. With bank failures and mortgage defaults increasing, and roughly $600 billion in loans coming due in the next year, serious pressures could be expected to be exerted on commercial property values in the short term.

The Long Term: Over the long term, the most important economic indicator of CRE values is unemployment. Until businesses regain confidence that there is increased demand for their products, new hiring will remain at a standstill. With unemployment continuing at historically high levels, space requirements could be expected to remain at its current low levels, and it remains doubtful that CRE values could sustain a meaningful recovery. Losses in CRE values could have the snowballing effect of further tightening already strict bank lending standards, thereby making a recovery all the more difficult.

-Jonathan Fischer, MAI

Jonathan Fischer, MAI, is a Managing Director in NAI Global’s New York City office and works with investors and financial institutions as a member of NAI’s Special Asset Solutions group.