Real-estate funds saddled with tens of billions of dollars of boom-time properties are beginning to get some relief from Wall Street firms and other investors hoping to capitalize on their need for cash.

Opportunistic investors are buying stakes in troubled funds at steep discounts or lending the funds money in deals that give them a steady return and potentially a share in the profit if real-estate markets rebound. At the same time, some funds are succeeding in persuading existing investors to cough up more capital, although this typically is an uphill struggle.

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The CoStar Commercial Repeat-Sale Indices (CCRSI), produced by CoStar Group, found that investment-grade property continued to decline in value for the second straight month in July.

Properties of sufficient quality and size for inclusion in large institutional portfolios saw their value decline by 5.05% during the month following a similar dip in June. The cumulative drop of nearly 10% over the two-month period nearly offsets the strong 11.78% increase in May that gave analysts hope that the recovery might be accelerating. As a result, the three-month change in the investment grade index ending July 31 posted a slight 1% increase. The CCRSI August report is based on data through the end of July.

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The debate over tax cuts enacted in 2001 is expected to heat up when the U.S. Senate reconvenes in September after its summer recess. The maximum tax rate on capital gains and dividends will revert from the current 15%, a 70-year low, back to 20% on Jan. 1, 2011, and commercial real estate experts are beginning to speculate on the impact that reverting back to the higher rates will have on the still-fragile economic recovery.

The likelihood of higher marginal and capital gains and dividend taxes, along with the impacts of health-care reform, financial regulatory reform and proposed changes in the way investment and leasing income are accounted for, has been a major preoccupation of the real estate industry in 2010. As the stretch run for the mid-term election campaigns unfolds, however, with the national unemployment rate stalled at around 9.5%, many Republicans and U.S. businesses are wasting no time in calling on President Obama and the Democrat-controlled Congress to extend the capital gains tax cuts for all income brackets, including families earning at least $250,000 a year.

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Since the start of 2009, buyers and sellers have transacted about $16.5 billion in distressed commercial real estate sales. Certainly more are expected to follow. Banks and CMBS special servicers are currently dealing with nearly $290 billion in distressed loans and properties.

CoStar Group recently analyzed the state of distressed real estate across the U.S., and presented its findings in a webinar on Wednesday in which it, discussing who is holding distressed real estate, how much presently exists by product type, what distressed deals have closed so far, and where the best opportunities are expected for buying distress in the near future.

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James Currell is struggling to prevent his Minnesota home from being foreclosed. But his lender isn’t a bank. It is the U.S. government.

The Federal Reserve Bank of New York is facing the prospect of foreclosing on a number of properties in the coming months, from homes to commercial buildings, a result of a souring mortgage portfolio it took over when it helped bail out Bear Stearns in 2008.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last week, is a cornerstone of Congress and the Administration’s financial regulatory reform agenda, creating the most sweeping changes in U.S. financial regulations since those put in place following the Great Depression.

The regulatory overhaul of the U.S. financial markets comes as commercial real estate has begun a nascent recovery following the Great Recession and the financial crisis of 2008. And while the new regulatory framework will undoubtedly impact the capital-intensive commercial real estate market, it may be years before the full extent of the impact will be known after the specific rules and regulations are developed to implement the law’s provisions.

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The U.S. industrial real estate market now appears to be headed into recovery after several quarters of negative absorption.

With the economy sending out mixed signals but generally gaining strength, absorption of industrial buildings turned positive in the second quarter following six consecutive quarters of net loss, CoStar Group reported in its State of the Commercial Real Estate Industry Mid-Year 2010 Industrial Review & Outlook. The national industrial vacancy rate declined for the first time in two years, according to the company’s most recent analysis of industrial property markets.

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Retail sales declined in June while more goods piled up on business shelves in May, underscoring a dilemma facing the U.S. economy.

Up to now, the recovery was fueled in large part by businesses rebuilding inventories depleted during the recession. But that process can’t continue if consumers cut back on spending, as now appears to be happening.

The Commerce Department reported Wednesday that retail sales fell 0.5% in June from May, the second month in a row that sales declined.

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Some banks have a special technique for dealing with business borrowers who can’t repay loans coming due: Give them more time, hoping things improve and they can repay later.

Banks call it a wise strategy. Skeptics call it “extend and pretend.”

Banks are applying it, in particular, to commercial real-estate lending, where, during the boom, optimistic borrowers got in over their heads to the tune of tens of billions of dollars.

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After more than two years of dark clouds across much of the Sunshine state, a few rays of sunlight are finally beginning to break through. We believe the recession ended in Florida shortly after it did nationwide, which we deem was around the middle of last year. Nonfarm employment has risen during three of the past four months, producing a net gain of 78,000 jobs since bottoming in January of this year. While part of the recent improvement is due to hiring for the decennial Census, hiring has picked up across a broad assortment of industries, including hard-hit sectors, such as manufacturing and construction.

Unfortunately, Florida’s businesses have quite a bit of ground to make up and gains have, so far, been extremely tentative. Job losses during this past recession were far more severe than the nation’s and were the worst for the state in the modern era. Close to 925,000 jobs were lost across Florida between the cycle’s peak in March 2007 and the low in January 2010. This loss translates into 10.8 percent of all job losses nationwide. The heaviest cutbacks were in sectors tied most closely to the state’s housing boom. Just over a quarter of Florida’s job losses were in the construction industry, 10 percent were in manufacturing, 10 percent in financial services, 10 percent in retail trade and 5 percent were in wholesale trade.

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The bull-run by real-estate investment trusts ran out of steam during the second quarter as broader stock-market concerns, fueled by the European debt crisis, prompted investors to trim their holdings.

Overall, REITS declined 3% in the second quarter through Tuesday, as measured by the Dow Jones Equity All REIT index. That was better than the overall stock market, which declined 8.5%, based on the Dow Jones Industrial Average. But the latest REIT results pale in comparison to the previous two quarters; REITS posted gains of 10% in the first quarter, and 9.4% in the fourth quarter of last year.

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There are 960 fixed rate loans representing $9.6 billion scheduled to mature by the end of the year, according to a Fitch Ratings’ review of CMBS fixed rate commercial loans. Of these 960 loans, 103 loans representing $2.3 billion (23.3%) are in special servicing. Of those in special servicing, 27 loans (representing 48% by balance) are current.

The maturity breakdown by month through December is as follows:
* July: 148 loans, $1.7 billion
* August: 134 loans, $1.4 billion
* September: 154 loans, $1.1 billion
* October: 180 loans, $1.9 billion
* November: 161 loans, $1.6 billion
* December: 183 loans, $1.9 billion

Of the 148 loans maturing in July, 133, having an average balance of $8.5 million, are current and performing. Retail properties secure 40% of the loans (by dollar balance), followed by 34% office and 12% multifamily. By vintage, 57% of the maturing loans are from 2005 transactions, followed by 26% from 2000 and 8% from 2006 transactions. A majority of the loans have reported year-end 2009 results and have a weighted average debt service coverage ratio of 1.72 times.

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A new accounting standard is taking shape that could change the way tenants choose to lease space, with broad consequences for the commercial real estate market.

The Financial Accounting Standards Board, which sets American standards, has been working with the International Accounting Standards Board to merge its generally accepted accounting principles, or GAAP, with international standards. One major piece of the puzzle is the accounting for leases.

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Last week’s memorandum from President Obama directing federal agencies to eliminate excess space and reduce real estate-related spending while moving toward a clean energy economy has raised many questions over the impact the new initiative is expected to have on the commercial real estate market.

The government owns or leases 354 million square feet in more than 2,200 localities across the country, according to the General Services Administration (GSA). Under the new plan, which the president expects to generate $8 billion in savings by 2012, all federal departments and agencies are to evaluate their portfolios and strip away any excess properties, as well as make better use of the real estate assets that they have. Obama called for the federal government to take a more cost-effective, asset-management approach to managing its real estate, identifying and eliminating surplus assets; terminating or not renewing leases that are not cost effective; consolidating operations when possible; increasing occupancy in current facilities through better space management and alternative workplace arrangements; and identifying offsetting reductions in inventory when new space is acquired.

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How will FASB’s pending changes to GAAP surrounding accounting treatment for leases impact corporations?

The proposed changes to Generally Accepted Principles (”GAAP”), when accounting for real estate (and equipment) lease commitments, will significantly change recognition for leases that are now classified as operating leases.  Once codified by the Federal Accounting Standards Board (”FASB”), assets will then be classified predicated on a corporation’s “right-to-use” the leased property, whereas a lease liability will be classified based upon a corporation’s obligation to pay rent.

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The amount of losses on distressed CMBS loans resolved in the past year has jumped 33% to where noteholders are now recovering approximately 43 cents on the dollar. And, say analysts, the losses are expected to continue to mount this year.

The average loss severity rate or the ratio of realized loss to liquidation balance for U.S. commercial mortgaged-backed securities (CMBS) loans resolved with losses in 2009 was 57% compared to the 43% rate in 2008, according to new data from Fitch Ratings. Those losses outpace the cumulative historical average of 37.2%.

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Real-estate prices are enticingly low in many areas of the country, prompting business owners to pursue sweet deals on storefronts, manufacturing facilities and other commercial properties. But because banks remain wary of commercial real-estate loans, landing financing to make such a purchase can be time consuming and tedious.

Compared to peak prices in October 2007, commercial property values are down 42%, according to Moody’s Investors Service Inc. Price index reports compiled by Moody’s and Real Capital Analytics Inc. show that as of March 2010, the cost of industrial and office space fell 32% in the last two years. Retail space also plummeted 28%.

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U.S. industrial real estate markets began 2010 much like they finished 2009: poorly. Demand for warehouse space remained elusive for most markets as warehouse users wanted further evidence the economy was on a sustained growth path before committing to new premises. Rents fell again and continued a nine quarter-long series of declines. Even though the economy registered relatively robust growth in the first quarter and further expansion is expected in the coming quarters, U.S. warehouse markets are unlikely to stage any vigorous bounce back until year-end at the earliest. Even though the Institute for Supply Management (ISM) manufacturing index posted a ninth consecutive reading above the critical “50” level (April – 60.4), businesses remained somewhat hesitant to commit to expansion even if orders are on the rise and profits are increasing. For the next few quarters a further increase in vacancy is anticipated, although at a much reduced rate with vacancies plateauing as early as the third or fourth quarters.

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Some real-estate funds, which raised billions of dollars hoping to pounce on bargain properties, are returning money to investors after finding slim pickings, as many banks avoid dumping property by extending and restructuring loans.

A slew of private-equity funds, including ones run by Morgan Stanley, Rockpoint Group LLC and Chicago developer John Buck’s firm, have taken the unusual step of allowing investors to exit their funding commitments when the funds’ investment period expired. A total of 19 private-equity real-estate funds have either returned or plan to return more than $6 billion of capital to investors, said Real Estate Alert, a trade publication. Others have sought to extend their investment periods or change their investment mandates in light of the short supply.

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