The overall trend in office vacancy has been down since the depths of the recession. However, the last few months have seen a slowdown in the rate of absorption. With the consensus outlook for the economy being cruising along at "stall speed" the outlook is for continued, although slow, improvement. Reis doesn't expect the office vacancy rate to dip below 15% until 2014, a recovery that is half the speed of the last recovery.
The Atlanta Business Chronicle recently reported that there are two large office properties in distress. The owners of Colony Square in Midtown are close to defaulting on two loans on that property. Already in foreclosure is 245 Perimeter Center, whose owners tried and failed to restructure the debt on that property.

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The foreclosure backlog continues to build up and delinquent borrowers are able to spend more time in their homes before the lender repossesses the home. Today, when a borrower defaults, they continue to live in the home, without payment, for one year and nine months. This length of time between default and repossession is more than twice as long as it was three years ago.

The number of defaults in the pipeline has been huge, and lenders have had to pick and choose which ones to deal with. In August there were 4 million homes 90 days late on payment or in foreclosure. Many of the delinquent borrowers are delinquent for the second time. They caught up on their payments once, but now they aren't paying again. Until these foreclosures are pushed through the system and exposed to the market their numbers will continue to weigh on expectations and values.

This summer, as Europe reared its ugly head yet again, and the U.S. economy showed signs of impending recession, investors pulled back from Commercial Mortgage Backed Securities (CMBS). Recently Standard and Poor's decided against rating one of these commercial real estate-backed bond deals. Even the "safest" and senior of the tranches of debt are now expected to provide buyers with more protection than what was demanded earlier this year.

Just as only the best properties in the best locations have been fetching high sale prices while the rest of the market remains soft, the senior level CMBS debt is selling quickly, but there is little demand for the more risky securities. The recovery of the CMBS market has helped to support commercial real estate values recently. Given the ultra low interest rate environment, the returns on commercial real estate have looked relatively good, and CMBS added needed liquidity.

Although the U.S. economy isn't expected to double dip, sluggish growth will continue to weigh on business growth and the commercial real estate recovery. The "smart money" is still avoiding all but the best of assets, and even the best are paying up to borrow money now. For now Class B and Class C assets will continue their bottoming process.

Sales of existing homes rose 7.7% last month compared to July. Economists had projected a somewhat lower increase. The increase is attributed to buyers being lured back into the market by rock bottom prices.

Separately it was announced that foreclosure filings increased 7% in August compared to July. Foreclosure filings still remain significantly lower than the pace of filings a year ago. The increase in foreclosure filings is attributed to lenders getting past the "robo-signing" controversy that they have been dealing with for almost a year. The lenders are now foreclosing on all of the delinquent owners that have been enjoying "free rent" since the foreclosure slowdown began.

Also, the S&P/Case-Shiller index of property values in 20 cities fell 4.1% from July 2010. There was a similar year-over-year drop in the June index value. The index was essentially unchanged from June to July of this year. The recent stability in prices is attributed by many to the holdup in foreclosure filings earlier this year.

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I pity the complacent souls who thought "appealing my assessment is too much trouble to save a couple of hundred." The day after the property tax assessment appeal deadline the County Commissioners have stuck it to you, me, and everyone else that owns property in DeKalb County. The good times were real good until they ended a few years ago and county tax receipts plummeted. Now its impossible to pay for the budget that the house of cards built, unless we all pay up.

Too many people don't understand how local government is funded and don't even know that they can appeal their tax assessments. Or, as I said above, they just don't think its worth the effort to fight "city hall." There are only six more months left until the 2012 appraisal date (1/1/12) for 2012 taxes. Does anyone really think that the market is going to get a whole lot better between now and then? For 2012 I hope to do a better job of educating my potential clients.

According to CoStar the level of distressed commercial real estate loans appears to be reaching a peak. To date, the recession has only had an adverse impact on approximately 10% of all commercial real estate debt. The amount of distress still totals into the hundreds of billions of dollars. More normal levels of commercial loan origination should return in 2012, even as the level of distressed debt continues to stay high.

Banks are already setting aside fewer dollars for losses and that should free up capital for new loans. Only 7.4% of banks hold 80% of all the distressed commercial debt. The 10 largest banks in the country hold 29%. On the short list of five banks that have distressed real estate assets making up more than 30% of total assets three are in Georgia. They are First Choice Community Bank, Dallas, GA, High Trust Bank, Stockbridge, GA and Security Exchange Bank, Marietta, GA.

New home sales fell in May, offering further evidence that the real estate market is sputtering into its traditionally busiest time of year. The unemployment rate will continue to remain higher than usual until the real estate market is cleared of distressed properties and can be kicked into a more normal state. It was recently reported that the "shadow inventory" of distressed properties has recently fallen to a five month supply.

Most U.S. adults don't think there will be a real estate recovery until 2014. Although most real estate "experts" think that we have reached and are bouncing along the bottom of the cycle, value appreciation may be several years away. We are in a chicken or egg scenario where people say that the real estate market will improve when the unemployment rate drops, when so many of the jobs that were lost are related to the real estate market. Its going to be a while.

FNMA's recent forecast reviews much of what has been happening in the market for the past few months. They report that housing starts remain at depressed levels due to competition from foreclosures, and the spring housing market has remained lackluster and shows little momentum heading into summer. They report that construction spending increased in April, but only because volatile home improvement costs pushed it up. Stripping those costs out of the data shows that construction spending actually dipped below the first quarter's average, "dashing the hope for a weather-related rebound in residential investment in the second quarter."

Mortgage purchase applications fell in May and continued to fall in early June. Pending home sales plummeted 12 percent in April. They predict that continued declining home prices will decrease household net worth and hurt consumer confidence and spending. FNMA now doesn't expect the Fed to raise interest rates until the second half of 2012.

If you have any faith in the ability of this country and its people to right the course of this ship, then sometime in the next year is a great time to buy residential real estate. I believe that some day we will look back on this time and say "that was the opportunity of our lifetimes." Just like the spring of 2009 was the time to invest in the stock market, in hindsight 2011 will probably be seen as the time to invest in housing.

Hotel fundamentals have gotten up off of the floor although the economics are somewhat spotty. The state of the U.S. economy has some market participants remaining cautious, but most believe that the economy will continue to strengthen in the second half of the year. Supply and demand fundamentals are good in many markets and revenue per available room is expected to increase 8% according to Smith Travel Research, and should continue to grow at the same rate in 2012.

Capitalization rates, or the return to the investor based on the purchase price and net operating income, have fallen through 2010. This is primarily due to the fact that the sold properties are mostly "trophy" assets in major metropolitan areas. If sales activity picks up in the rest of the market, capitalization rates could rise even as property economics are improving. The capitalization rate is the ratio of income to value, and if income is rising faster than values, capitalization rates rise.

In addition, expectations of higher inflation and interest rates will also put upward pressure on capitalization rates as the risk free rate of return (U.S. Treasuries) rises. It has been surprising how quickly capitalization rates have dropped since the end of the "great recession." They have dropped too far and too fast as some publications that don't differentiate between the "trophy" market and everything else paint a rosy picture. I would like to see more sales of all types of income producing properties from various sub-markets so we can get a "real" indication of where capitalization rates are.