The forecasts are rosy for the CRE market, but systemic headwinds still exist, making this a tough sector to bank on profits.

By Kit R. Roane, contributor

Until recently, the smart money saw commercial real estate as the next asset class to do a number on the economy. Now some believe it is turning into a feather in the recovery's cap. But every bet has its risks -- and in this case, better days may be farther into the future than many investors would like.

The bullish case for the commercial real estate market is that the bad news is baked in, and what's left will likely dissipate as the economy gains steam. Wells Fargo () sees commercial real estate actually contributing to growth by the second half of this year, driven by more interest in leasing, steadying rents and increasing sales.

"Operating fundamentals for all major property types are either improving or showing signs of stabilizing," notes the Wells Fargo Economics Group in its recent , declaring that "the troubled commercial real estate market has turned the corner."

Meanwhile, Lawrence Yun, chief economist for the National Association of Realtors, that increasing commercial leasing demand and a steadily improving economy "means overall vacancy rates have already peaked or will soon top out." And Jones Lang LaSalle is anticipating that private sector growth will send investors flocking to apartments, as well as office, retail and industrial spaces. The global real estate company sees investment transaction volume increasing to the tune of $92 billion, which would mark "an 80% increase over the low reached in 2009."

Economics is known as a dismal science for a reason: forecasting the economy is inexact at best. But "the signs of improvement are pretty widespread and are real," says Professor David Geltner, who heads the Massachusetts Institute of Technology's Center for Real Estate, adding that he's still not among those who believe it's time to give an all clear. "The market is on the mend, but not out of danger by a long shot."

Even if the underlying market isn't yet fit, investors using Real Estate Investment Trusts to bet on a future recovery have, so far, . The debt of REITs returned more than 13% last year, while the FTSE NAREIT US Real Estate Index clocked in total returns of 27.4% in 2009 and 27.5% in 2010. REITs have been better performers than just about any asset, except gold.

Getting the deals done

Closer to the action, real estate deals, particularly those backed by REITs or foreign buyers, have been on the rise, helping to support prices in some segments. Geltner notes that prices for "trophy" properties — prime real estate in gateway and safe harbor cities like New York, Chicago and San Francisco — have soared, while investor interest in "distressed" deals has stabilized prices there. The consultancy Deloitte & Touche LLP says that more than 16% of all commercial deals in 2010.

Richard Hyman, president of Triquest Financial, a Manhattan-based real estate investment and advisory firm, says he has also seen more tertiary deals in fly-over markets like Ohio, Colorado and North Carolina. A pickup in these areas could signal another leg in the recovery, with some investors looking for diversification, or just cheaper prices than the coasts can offer. But Hyman cautions reading too much into the nascent action.

The largest part of the commercial real estate market, what Geltner calls the "soft middle," has barely budged. And Hyman's view is that a greater number of marginal and distressed properties are moving mainly because, after sitting on them to see how the economy shakes out, sellers are finally willing to take a hit. "It just seems like people have become more reconciled to the world as it is today," he says. "It is definitely being more realistic, than optimistic."

One reason it's hard to start popping champagne corks is the nation's employment rate, says Hyman. A rough gauge is that each new hire creates about 250 square feet of economic activity. Despite some gains, the nation's has not shown enough strength to budge the unemployment rate and many companies are still planning layoffs..

Increasing and more volatile interests rates could generate other troubles for the market, making buyers skittish and leaving owners with problematic refinancing costs. Deutsche Bank () recently cautioned debt buyers about both risks, explaining that investment in commercial real estate instruments of any stripe is "essentially a levered play on the economic recovery and the rates market."

Without an ever-improving economy, two of the most important diviners of a healthy commercial real estate sector, occupancy and rental rates, aren't going to recover. Currently they are stuck in decline and "elevated vacancies are expected to make further rent reductions necessary before a gradual improvement can begin," Deloitte & Touche.

Add these to the mix — the market's oxygen, commercial mortgage-backed securities (CMBS), still find few takers; the amount of delinquent CMBS loans ; banks keep nursing along billions in troubled loans they are afraid to call delinquent; and $1.4 trillion in bubble-era commercial real estate debt comes due within the next four years. Although real estate may zoom ahead, with all these unknowns, perhaps it might be prudent to reduce expectations for the new year, at least just a little bit.

Also on Fortune.com:

The latest fourth quarter 2010 U.S. data from Reis Inc. supports tempering expectations of continued positive trends in commercial real estate. According to Reis, the final quarter of 2010 saw the first increase in occupied space in the office sector since the end of 2007, and asking and effective rents are reported slightly higher from just few years ago. Still, the vacancy rate for the sector remains at a seventeen-year high, and many office properties are under duress in what remains a difficult leasing environment. Expectations for the retail sector are bifurcated: regional malls appearing to be on the precipice of a recovery at the expense of neighborhood and community centers whose retail tenants are now able to trade up to cheaper mall space. Responding to tepid economic growth and a recovering—albeit anemic—labor market, renters have returned to the multi-family market, enabling many landlords to terminate the costly concession packages of recent years.

While understanding market fundamentals is critical, investing in commercial real estate for most investors happens at the local level. Big picture trends aside, accessing local market data is one of the best ways for investors to hedge their bets. A trusted source of real estate data and analytics for 30 years—Reis develops trends and forecasts from property-level data collected by a team of real estate analysts in telephone interviews with building owners and managers across the nation and then reports this data in ways needed to make smarter, informed decisions.

For more apartment, retail, and office property insights in 200 metro areas and 1,800 submarkets/neighborhoods nationwide, go to ReisReports.com.

Connie Vitucci,
ReisReports.com

Posted By Connie Vitucci, New York, NY: January 11, 2011 1:45 pm

Swiss banks (a cartel) prefer to reduce (only if necessary) mortgage rate to interbank rate and let the value of Swiss real estate high then exacting stubborn a high rate and then must selling the real estate at half the price! Better earning little that loosing for sure! So Swiss real estates rises or stagnate, but never crashes! (undeniable advantage of our swiss bank cartel)

Posted By Jean-Francois Morf, Charrat, Switzerland: January 3, 2011 2:53 pm « »CNNMoney.com Comment Policy: CNNMoney.com encourages you to add a comment to this discussion. You may not post any unlawful, threatening, libelous, defamatory, obscene, pornographic or other material that would violate the law. Please note that CNNMoney.com may edit comments for clarity or to keep out questionable or off-topic material. All comments should be relevant to the post and remain respectful of other authors and commenters. By submitting your comment, you hereby give CNNMoney.com the right, but not the obligation, to post, air, edit, exhibit, telecast, cablecast, webcast, re-use, publish, reproduce, use, license, print, distribute or otherwise use your comment(s) and accompanying personal identifying information via all forms of media now known or hereafter devised, worldwide, in perpetuity. .

#termSheetTout {font:normal 12px/22px Arial;padding:10px;} #termSheetTout img {margin-bottom:10px;} Receive Fortune's newsletter on all the deals that matter, from Wall Street to Sand Hill Road. Written by Dan Primack and emailed every day and as news happens.ContributorsStreet SweepTerm Sheet

Company	Price	Change	% Change
	5.11	0.07	1.39%
	15.20	0.43	2.88%
	21.11	-0.18	-0.85%
	45.10	0.65	1.46%
	28.24	0.05	0.20%

Data as of 3:41pm ET

Index	Last	Change	% Change
	11,776.86	44.96	0.38%
	2,752.46	17.17	0.63%
	1,291.82	8.06	0.63%
	3.33	0.03	0.97%

Data as of 3:55pm ETSponsored by

1.  
2.  
3.  
4.  
5.  
6.  
7.  
8.  
9.  
10.  

| | | | |
| | | | | | |
chooseFortEKeyFooter(); | | | | | © 2011 Cable News Network. A Time Warner Company ALL RIGHTS RESERVED.
under which this service is provided to you. . .

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. . Morningstar: © 2011 Morningstar, Inc. All Rights Reserved. The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2011 is proprietary to Dow Jones & Company, Inc Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2011. All rights reserved.

document.write(unescape("%3Cscript src='" + (document.location.protocol == "https:" ? "https://sb" : "http://b") + ".scorecardresearch.com/beacon.js' %3E%3C/script%3E")); COMSCORE.beacon({ c1:2, c2:6035728, c3:"", c4:"", c5:"", c6:"", c15:"" }); jQuery(document).ready(function(){ // set up horizontal scroll setupFeaturedBoxes(); }); getFeedData(); //for clickability changeLinkTargets( document.getElementsByTagName("body").item(0),'new' );

Please create a screen name to access this feature.

Screen name (Select one with 3-12 characters; Numbers and letters only)

Forgot password

Enter your e-mail address below and we will send you an e-mail with a link and code to reset your password.

E-mail

Password selection

E-mail

Reset code

New password

Log in & let's get started!

E-mail

Password

Remember me for two weeks

Not a member yet?

Sign up or

Screen name

Select one with 3-12 characters;
Numbers and letters only

E-mail

Make sure you typed it correctly.
You will receive an e-mail to validate your account

Password

Make it 6-10 characters, no spaces

Type what you see in the grey box

If you can't read this,
Yes, I would like to receive occasional CNNMoney member updates about new features and special offers.

CNNMoney will use the information you submit in a manner consistent with our . By clicking on "sign up" you agree with and and consent to the collection, storage and use of this information in the U.S. subject to U.S. laws and regulations. ()

For our international users, please be aware that the information you submit when registering for our services is collected in the United States of America. In addition to being subject to our Privacy Policy, the collection, storage, and use of your data will be subject to U.S. laws and regulations, which may be different from the laws and regulations of your home country. By registering for this service, you are consenting to this collection, storage, and use.

We're Sorry!

This service is temporarily unavailable. Please try again soon.

Thanks!

Please check your e-mail and click the link to confirm your membership. Then, you'll be ready to participate in all activities and conversations on our site.

  Add comment

Name:
E-Mail:
Comment:
Enter code: