Architecture trade group the American Institute of Architects said in a press release issued on July 14 that commercial real estate construction is expected to decrease by more than 20 percent this year and will only see a marginal increase of just over three percent in 2011.

The AIA says that, even with modest improvements in the economy, poor CRE construction conditions persist because of oversupply, weak demand, a continued decline in commercial property values and a tight credit market.

When things do begin to turn around, the retail and hotel sectors are expected to see the strongest growth, according to AIA Chief Economist Kermit Baker, PhD.

For 2010, the AIA says that hotel construction will be down over 43 percent, office construction will lag 29 percent, retail will be down 25 percent and industrial space construction will be off by 21 percent.  All categories except industrial are expected to see single-digit growth by the end of 2011.

For the full AIA press release, go here.

Commercial real estate loans – which went from a high of $230 billion in 2007 to just $3 billion two years later – are making a comeback as major bank players cautiously dip their toes back in the market, lured by more conservative underwriting and the perception that property values have bottomed out.

In the last month, there have been an estimated $5 billion in CRE loans generated on eight issues of commercial mortgage-backed securities.  But lenders are still being choosy, with high occupancy, premier properties in major metro areas attracting lenders while smaller markets still struggle to find loans.

A senior managing director of CB Richard Ellis was quoted in a New York Times article as saying, “It really is a tale of two markets.  There are those assets that have strong cash flow and there are those that don’t. Those that do will find a home in today’s market and have a robust relationship with lenders, insurance companies and conduits. And those that don’t, it’s almost as if you’re seeing them fall off a cliff.”

Leading issuers include JP Morgan Chase and the Royal Bank of Scotland; Citigroup said it is also poised to re-enter the commercial mortgage-backed market as investor response has exceeded supply.

For the first time in three months, U.S. commercial real estate property values rose in April, according to Moody’s Investors Service.

The Moody’s/REAL Commercial Property Price Index rose 1.7% from March; however, prices declined 16% from April of 2009 and are down 41% from the Index’s October 2007 high.

From a Bloomberg report:

Economic growth in the second half of 2009 and first quarter of this year have helped lift prices for offices, warehouses and stores from an October low. Property sales jumped 50 percent in the first quarter from a year earlier to $15.4 billion, Real Capital Analytics Inc., a commercial real estate research company in New York, said April 22.

“What we have is a bottom in the market,” Christopher Cornell, an economist at Moody’s Economy.com in West Chester, Pennsylvania, said in a telephone interview. “We have seen essentially a flat trend in commercial property prices in the last several months.”

Pacific Investment Management Co. (Pimco) released their analysis of the commercial real estate market this week, saying that unemployment and property price uncertainty will continue to put a damper on recovery.

A Wall Street Journal article outlined the key findings:

–Capital has returned to commercial real estate. “But optimism should be tempered, because national price indices are misleading when transactions are limited and fail to reflect the significant uncertainty around property valuations,” the report said.

–The transfer of commercial real estate risk out of the banking system may take longer than previous cycles, and as a result, prices won’t return to 2007 levels only toward the end of this decade.

–Macroeconomic factors such as unemployment will affect the outlook for rents, vacancies and capitalization rates.

Pimco suggests there are opportunities for patient investors as the deleveraging continues. Some of the options include dispositions of the assets of banks taken over by the Federal Deposit Insurance Corp., restructuring of large commercial loans and buying discounted subordinate positions in commercial mortgage-backed securities.

An article last week in the LATimes noted that while prices are not exactly climbing, investors are “on the prowl again” and bidding is brisk for desirable commercial properties.

The report noted that there is a lot of commercial real estate investment money on the sidelines awaiting bargains that just haven’t materialized because lenders have been extending loans.

When attractive buildings become available, bidders are showing up.  The Wilshire-Bundy Plaza, a preeminent Brentwood office building, drew 40 bidders and fetched $111 million.  One CRE broker called that “an incredible price”.

The article also noted:

If the commercial real estate market continues to gain strength it would represent a significant shift in economic risk because many experts had feared that mass defaults by landlords on their loans could cripple banks and drive the country deeper into recession.

“It’s true that thousands of commercial loans must be worked out and some of these properties will enter the market in 2010,” investment banker David Rifkind said. But “federal policy has been accommodating to banks and they are not being forced to realize losses.”

“There is so much money sitting on the sidelines that when distressed assets or even small pools of loans come to market, there is a flood” of interest, said Rifkind, managing partner of George Smith Partners.

“That became palpable to us in the first quarter,” he said. “Money can’t stay on the sidelines for long periods of time. It has to retool and be put to use.”