U.S. commercial real estate was expected to collapse and drag down the economy but analysts were in for a surprise. Commercial real estate is surging ahead on many levels. The surprising health of commercial property is evident across the country. Obviously, global centers like New York City thrive in a time of high and profitable business activity.
Real Capitals Analytics Inc. reported that investments in office space accounted for the highest rise – more than doubling from 2009 to $41.6 million. According to an index developed by the MIT Center for Real Estate, prices of commercial properties sold by institutional investors rose 19% during 2010 - the second-largest recorded increase. Buyers, lenders, and investors – all groups are pleased with the improvement in this market.
Buyers appreciate the low interest rates. The promise of cheaper financing and greater yields is attracting buyers.
Lenders welcome increased earnings. The rise gives them a cushion for absorbing losses. They are eager to sell distressed properties and loans. TOP Hotel Brokers of NYC assessed the popularity of NYC distressed properties in a December 2010 report.
"Distressed properties are still expected to account for a significant percentage of hotel sales in 2011. Certain investors are interested in this category of hotel. Various high-end hotel properties were sold during the past year. Several of those hotels were purchased in distressed circumstances." ~ TOP Hotel Brokers of NYC
The government's strategy seemed to work for buyers and lenders. Since interest rates are low, lenders have more flexibility. They can hold on to troubled assets for a while. With improving values, lenders and owners have a little room to work out challenging issues.
Investors are gaining confidence in the market. Their optimism is driving the prices of commercial mortgage-backed bonds. In fact, prices of these bonds are higher than they have been in the past two years. Investors' enthusiasm about NYC hotels was summed up in a recent TOP Hotel Brokers of NYC report.
"Yet current investors do not seem to be concerned about any increased prices. They just want to be part of the vibrant NYC real estate scene. The Manhattan hotel industry is a very attractive market." ~ "Buying Hotel Growth in NYC - Investors Strategy for Growth in Manhattan Hotel Real Estate"
Of course, it would be irresponsible to suggest that commercial real estate is booming - without exception. The overall trend looks terrific, market and credit requirements have leveled out, and the pricing market is undergoing stabilization in key areas. Certain metrics are showing improvement but there is still an element of unevenness and a percentage of distress.
Lenders who specialize in commercial real estate can still feel a slight pinch. Specific banks will struggle and there will be more losses and additional delinquencies. Yet any loss in commercial real estate will not be the downfall of U.S. financial institutions.
"We do not see commercial real estate losses as a threat to systemically important financial institutions,” says Patrick M. Parkinson, Federal Reserve director of banking supervision and regulation.