For the past two weeks, we have taken a close look at severalfactors which impact commercial real estate values and howoptimist's (the Bulls) perspectives differ from those of pessimists(the Bears). We continue this discussion below:8 )Corporate earnings: Corporate earnings are important asthe more profitable companies are; the more likely it is that theywill hire employees to grow their businesses. Growing business needmore office space and growing retailers absorb vacant storefronts.The more employees that are hired, the better for our economy asoutput will grow and, most importantly, consumers will have moredisposable income and, presumably, they will spend most of it. Therecent stock market rally portents a more positive perspective onfuture earnings. Why the rally has been so strong is due todifferent factors depending upon whom you ask; the bulls or thebears. The Bulls: The bulls believe thatcorporate earnings have performed well above expectations at thispoint in the cycle and that this is reflected in a rallying stockmarket. They believe that these earnings are sustainable and willlead to new hiring initiatives. These earnings will lead tocorporate growth which will enhance real estate fundamentals,leading to a substantial and sustainable recovery. The Bears: The bears believe that much ofthe corporate earnings which have exceeded expectations were due,mainly, to massive cost cutting and that top-line revenue growthhas not resumed to levels which are needed to promote substantialnew hiring. The bears want to see top-line revenue growth continuefor a quarter or two before they believe corporate earnings aresolid. The rallying stock market, they claim, is based simply onfuture expectations, not solid earnings today which wouldprecipitate job creation.9) Capital on thesidelines: We have heard, and continue to hear, about themassive amount of capital that is sitting on the sidelines seekingopportunities to purchase distressed assets and core commercialreal estate properties which need to be sold. Each day we hearabout another fund or another investor that has entered the marketand is looking to buy. At this point in the cycle, it appears thedemand drivers are substantial, but, is this perception reality? The Bulls: The bulls believe that everyonewho says they have $5 million, or $50 million, or $500 million toinvest in real estate, have it. And they believe it is mostly fromunique sources indicating that there really are billions andbillions of dollars sitting on the sidelines waiting for anopportunity to buy. Clearly, the demand is out there in themarketplace as we see a significant number of bidders on each ofthe properties being sold today. On our income producing propertiesdozens of offers are obtained and on the notes we have sold, whichwere collateralized by New York City properties, we have receivedover 50 offers on every one. A combination of high net worthindividuals, families, institutional capital and foreign investorshave created demand unlike anything we have seen in recent times.The bulls believe that this overwhelming demand, which exertsupward pressure on value, will dominate the factors in the marketwhich exert downward pressure on value.The Bears:The bears believe that, of the people claiming to have capitalwaiting to invest in commercial real estate, many arerepresenting the same pools of equity. Many of the funds have notbeen raised with cash sitting in accounts. They merely have verbalrepresentations that money is available "for the right deal". It isvery likely that equity sources have many "scouts" in the marketclaiming to represent the same pools of equity. If this is thecase, the bears believe that the amounts of capital claimed to belooking for opportunities is grossly overstated. They alsobelieve that, while there may be a lot of capital availablefor "good deals", the expectations of what a good dealis, is unrealistic and, therefore, this demand isartificial.10) Financing: Clearly, debtavailability is a significant driver in our investment salesmarketplace. Community and regional banks across the country haveinvested much of their risk based capital in construction anddevelopment projects and the result of this is that 124 banksfailed in 2009 and is why today there are 720 banks on the FDIC'swatch list of potentially troubled institutions. Fortunately, forthose of us in New York, our community and regional banks haveinvested primarily in cash-flowing properties and they havemaintained very healthy portfolios. Because of this, they havecontinued to lend throughout this crisis. The commercial and moneycenter banks have, however, for the most part, withdrawn from thereal estate lending scene. Moreover, construction financing isextraordinarily challenging to find today. This is trueparticularly for any asset class other than residential rentalproperties. Even for residential rental construction financing, lowloan-to-value ratios exist and recourse is generally included for,at least, part of the indebtedness.The Bulls: Thebulls believe the financing picture is thawing significantly andexpectations are that the commercial and money center banks will beback in the game shortly, if they have not already begun to makeloans. The bulls say that the CMBS market is on the road torecovery as evidenced by the recent transactions which began latelast year. They believe that, although loan-to-values are low andrecourse is required, construction financing is available and thatthere are lenders which are looking for strategic opportunities. Ifthis level of availability existed, it would be extremely positivefor the commercial real estate market.The Bears:The bears see the lending environment as still very limited.Capital availability is low and most real estate loans are beingmade on only the most conservative terms. The bears also view theCMBS market as still in a relative state of inertia. Theypoint out that CMBS transactions which have occurred thus far inthe cycle have helped only a very narrow slice of the marketplaceas loan-to-values are around 50 percent ( one transaction wasclosed at 75% LTV) and loans that are being made are more in theform of personal loans based on the strength of the borrower asopposed to the viability of the real estate project. This is notonly true for CMBS loans but also for traditional loans made byportfolio lenders. The bears believe it will be many years beforeconstruction financing comes back anywhere close to what its normaltrend has been.Next week, we conclude this discussion of thedivergence of perspectives between the bulls and the bears. We willconclude with the topics of cap rates, supply / demand dynamics andthe economic recovery. Until then......Mr. Knakal is theChairman and Founding Partner of Massey Knakal Realty Services inNew York City and has brokered the sale of over 1,050 properties inhis career having an aggregate market value in excess of $6.2billion.