Fundamentals Stabilize Despite Sluggish Economy

Commercial real estate was among the first industries hit by the global economic downturn, but according to Deloitte's Commercial Real Estate Outlook, it's been one of the first to recover. Transaction activity and net absorption have increased due to more financing opportunities and lower supply. Overall commercial real estate is improving, but it still faces challenges and uncertainty, particularly from a weak economic recovery, impending legislation and regulation, and a high level of defaults.

Absorption and Foreign Investment Up

Shrinking supply across all sectors has lead to net absorption increases among multifamily, office, retail, and industrial properties. Record-low multifamily supply contributed to a 2.5 percent year-over-year increase in effective rents in 1Q11. Office and retail attracted the most global investment and foreign investment in the U.S. While foreign investment in the U.S. was up 115.6 percent year-over-year in 1Q11, it may begin to slow as competition increases for high-quality properties and more domestic investors come off the sidelines.

Debt and Equity Financing Rebound

Loan originations in 2010 posted a 44 percent increase over 2009, a trend Deloitte expects to continue through 2011. Life insurance companies led originations, followed by government-sponsored entities Fannie Mae and Freddie Mac. The resurgent commercial mortgage-backed securities market is expected to originate $47 billion in issuances, which would be three times its 2010 total of $15 billion. The increased lending follows the easing of banks' credit standards, which can be attributed to primarily two factors: Increased transaction activity, which has given more clarity to investment pricing, and increasing levels of debt and equity capital available to refinance.

Real estate investment trusts, which raised $82.1 billion in capital in 2009 and 2010, drove a 124.3 percent year-over-year increase in transaction volume in 2010. Still flush with capital, REITs are positioned to dominate transaction activity through 2011. Distressed properties accounted for a large portion of transactions in 2010, a trend that's expected to continue as lenders curtail "amend and extend" loan modification policies in favor of more permanent resolutions.