There are signs in the commercial real estate market that credit is becoming available, and if this trend is sustainable, we can expect a positive influence on values. This sentiment differs from what I've previously written and shows the roller coaster ride we're experiencing.

A mid- July 2010 report by Marcus & Millichap Real Estate Investment Services indicates that, unlike a year ago, properties over $10 million are starting to see an easing in the credit markets as some lenders re-engage in higher-quality assets. Investors in the top tier are finally starting to see some reason for hope.

Overall, first-quarter commercial and multifamily mortgage-loan originations were 12% higher than during the same period last year. But they were 26% lower than during the fourth quarter of2009, according to the Mortgage Bankers Association's Quarterly Survey of Commercial/Multifamily mortgage originations.

According to the Federal Deposit Insurance Corp's latest numbers, commercial real estate credit quality continued to erode in the first quarter of2010 as well. Net charge-offs of loans secured by non farm nonresidential real estate properties increased by

$1.6 billion (155.5%). However, non current real estate construction and development loans fell by $1.8 billion (2.5%). It was the second consecutive quarterly decline in non current levels for both loan categories.

The total amount of troubled commercial real estate loans and foreclosed properties at commercial bank and savings institutions was up 33% from the first quarter of last year and the total topped $244.7 billion at the end of the Q1. This compares to $183.6 billion a year ago.

In addition to that lender activity, the CMBS market has a pulse again with US issuances of $2.4 billion in the first half of the year. But before the excitement begins, remember that these figures pale before the CMBS issuances of $197 billion reported between 2005 and 2007. What's different in 2010 versus last year is that we are starting to see multiple borrower deals with subordinate tranches. This is building some optimism back into the CMBS space as it moves away from the especially conservative deals of 2009.

Life companies are entering the market more aggressively, with the same report by Marcus & Millichap reporting an increase in mortgage originations of 131%. Life firms are competing for the best deals out there but are hampered somewhat by their own strict underwriting standards. In an effort to generate deals, they have broadened their scope to include a wider variety of properties and prices.

With capital returning to the commercial real estate market, some investors are starting to believe that we've turned the corner. There are higher levels of bidding activity in some of the major metro markets, particularly on trophy properties, those well placed assets and those in which below-market financing is available. Of course, considering what has been going on for the past several months, any positive sign is probably over-sold just as any negative news is probably not as bad as reported.

This type of hypersensitivity makes the valuation of assets very difficult. Appraisers are mirrors of the market and sometimes it feels as if we are in a funhouse, with the mirrors distorting what is really there. If the capital markets are loosening up as it appears, and if this is sustainable, the good news is values should start to solidify as the confidence of investors rises. Projecting if the bottom has been reached is too difficult at this time. Let's not forget that roughly $535 billion of commercial mortgage debt will come due between 2010 and 2011. With the value declines over the past few years, will there be enough equity left in the properties to allow for refinancing without cash injections? While the credit news is improving, it is too soon to proclaim a recovery is underway, but at least there are positive signs. Appraisers will continue to exercise vigilance and will try to keep their mirrors true.

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If Credit's Back, What Happens to Values?

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