The most significant event impacting commercial real estate inthe last decade, in my view, is the financial meltdown that becameapparent in August 2007. More than three years later, we are stillfeeling its effects. This financial dislocation has had a dramaticimpact on the leasing markets—rising vacancy rates, negativeabsorption, softening rents and practically no new constructionstarts.

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On the investment market side, there has been much pain as banksand borrowers deal with distressed assets. It will take some periodof time before the investment market returns to normal levels ofactivity whereby: capital becomes available for riskier deals; CMBSreturns as a significant element of the capital stack though in amore regulated form; distressed assets move through the pipeline;the appetite for risk spreads into the great, gray middle categoryof properties sandwiched between the two ends of the spectrum whereinvestors are now focused: core assets in primary,supply-constrained markets and the subset of distressed assets thatare marked down for a quick sale; leasing market conditions returnto equilibrium; and construction activity resumes broadly.

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The commercial real estate market in the current cycle issimilar in some ways, and not so similar in other ways, to the lastbig market dislocation in the 1990-95 cycle. Leasing markets are assoft as evidenced by the national office vacancy rate of 18.0%,tied for the all-time record that was posted in the fourth quarterof 1990 and the third quarter of 1991. And the 40% decline inaggregate property values from late 2007 to late 2009 is in thesame ballpark as value declines recorded in the early 1990s.

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What strikes me as different this time is that the broadreputation of real estate, i.e. investors’ attitude toward realestate as an asset class, has weathered this cycle better than theearly 1990s. A widely accepted theory in the 1990s was that themarket would not need another square foot of office space untilafter the millennium or perhaps much later. No one knew where jobgrowth would come from while some analysts thought technology inthe form of laptops and e-mail would permanently reduce the needfor office, retail and even warehouse space.

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In the early days of the Resolution Trust Corporation, it tookcourage for investors to step up and buy those assets even at “50Cents on the Dollar, Stupid” (the title of a piece back then bySolomon Brothers describing the plunge in property values). We canlook back at those times now and think it was a no-brainer to loadup on properties, but perhaps that it wasn’t all that evident atthe time. Compare that with the current cycle where so muchinvestment capital is parked on the sideline waiting for the rightproperties that bidding wars have returned when properties fittingthat profile become available.

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While commercial real estate has always been viewed as aninflation hedge, it is performing quite well in the currentdisinflationary economic culture—one more difference between theearly 1990s and the current cycle. Properties that are well leasedto credit tenants with minimal rollover risk are looking prettygood to investors compared with the risk that comes with stocks andthe low returns available from bonds.

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Thomas D’Arcy is president and chief executive officer ofGrubb & Ellis Company and is responsible for the day-to-daymanagement of the firm. He also serves as a member of the company’sboard of directors. He brings to this position 25 years ofsuccessful leadership experience at various public and private realestate companies. Before joining Grubb & Ellis in November2009, he was a principal in Bayside Realty Partners, a private realestate company focused on acquiring, renovating and developing landand income-producing real estate. Previously, he served aspresident and chief executive officer of Equity Investment Group, aprivate real estate investment trust, as well as chairman and chiefexecutive officer of Bradley Real Estate, Inc., a NYSE-listed REIT.D’Arcy has been the non-executive chairman of Inland Real EstateCorporation since 2008 and a member of the board since2005.

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