The past several quarters have been quite a ride for commercialreal estate. Quarter to quarter, the markets have dodged andweaved. One quarter there are deals to be had, only to be followedby evidence that the market has further eroded.

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Credit returns in the following quarter, and then comes newsfrom Real Capital Analytics that the total value of US distressedcommercial real estate is now $186.9 billion, includ-

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ing properties in default, foreclosure and lender REO. Thisrepresents a rise of roughly $20 billion from the previous quarter.So where are we now, and where are we headed?

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I continue to hear good news. At recent conferences I'veattended around the country, I have heard of and seen thestrengthening of certain real estate sectors, particularly healthcare and apartments. While this strength is not universal, thereare an increasing number of bright spots. At a series of lecturesat Georgetown University, Thomas Flexner, Citi groups global headof real estate, echoed these sentiments as he noted that companiesare issuing equity in hopes of acquiring properties selling at adiscount. Sectors benefiting from stocks trading at high premiumsrelative to their underlying asset values have been particularlyactive, most notably (and not surprisingly) health care andapartments. Flexner further pointed out that deal making isstarting to heat up as a result, with the third quarterrepresenting the most active stretch in the commercial real estatemarket since 2007.

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The recent passage of the Small Business Jobs Act (H.R. 5297)increases the government guarantee on the Small BusinessAdministration's flagship 7(a) loans to 90% through the end of theyear. Further, the bill waived fees on both 7(a) loans and 504loans, the primary vehicles to finance real estate through the SBA.This has set off a flood of pending loans with a reported $500million on a waiting list and an additional $1.5 billion in loanapplications waiting on lenders' desks.

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While $2 billion may seem like a drop in the bucket, it couldhelp jump- start the distressed real estate market. Sure, the SBAloan amounts are paltry compared to the $200 billion currently indistress, but it could be just the confidence boost that smallbusinesses need to get moving again. On the downside, it is stillunclear what effect President Barack Obama's pocket veto-rejectinga notarization bill that would have made it more difficult forconsumers to fight foreclosures that may not have been documentedproperly-will have on the capital markets in general.

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As you well know, many states have taken an active role inlimiting or even stopping foreclosures altogether. This time-outwill surely prolong the market correction for housing prices andwill likely have an impact on the emerging capital markets. Whilethis is primarily a residential issue today, residential leads thecommercial markets. Without health in housing, there can be no curefor the commercial real estate markets, either.

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So where are we headed? There has been too much talk of thecapital markets over the past few years: "If only the capital wouldcome back, the commercial real estate markets would be fine:' Butguess what? We lost sight of the basic tenet of real estate: supplyand demand. Not the supply of capital, although it is important,but the true fundamentals that drive real estate markets.

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No doubt, the brightest market participants did focus some oftheir attention on capital flows. These were the people who startedunloading their assets when the market started its heated cycle in2005 and 2006. These are also the same people today who have theequity to do deals, the right deals, based on the traditionaldrivers of value. Demand for product, upside potential in revenuesand occupancies and downward pressure on expenses. Want to knowwhere the market is going? Pay attention to what tenants aredoing.


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