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The commercial real-estate problem has become a focus of federal regulators in recent weeks as they stress-tested the 19 largest US banks to see where losses could pop up if the economy, rather than recovering, worsens.

The stress tests of banks was the focus of GlobeSt.com’s Quick Poll last week, asking readers if the tests made them any more comfortable or confident that the banks will get through the recession. A majority vote of 69% said the tests didn’t make them any more comfortable, while 31% said the tests showed they’ll get through the recession. Patrick Crandall, a managing director in the Los Angeles office of CIBC World Markets tells GlobeSt.com that the results are no surprise.

It is not surprising that the majority of respondents to the survey find little comfort in the results of the government stress tests. While the broader market generally viewed the results as favorable, GlobeSt.com readers are aware of just how difficult the environment is for commercial real estate…and that we are still in the early innings for our industry.

After peaking at $250 billion in 2007, the CMBS market has vanished, leaving a gaping capital shortfall for new and maturing loans. Transaction volume remains minimal and values are generally thought to have decreased somewhere between 25% and 40% from their peak in 2007. The aggressive rent growth and cap rate assumptions that were employed leading up to the peak in the middle of 2007 have turned into projected rent decreases and increasing cap rates across all markets. So the combination of lower values, decreased capacity in the system, and more stringent underwriting standards will continue to exert significant downward pressure on the market. Add to this continuing deterioration in the broader economy (unemployment, anemic consumer spending, etc.), and it is easy to see why the responses came back as they did.

However there is good news amid these difficult conditions. There are still lenders in the market with capacity and desire to provide capital, and new deals are getting done on a select basis. Generally they are smaller deals, more conservatively structured, and involve some level of recourse. But there are lenders willing to put their toes in the water even now, and over time more will get comfortable wading into the pool.

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