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.

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.

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.