The media has been quite generous in covering the residential real estate market, but the commercial real estate market functions a bit differently. The good news is that commercial markets are improving, but there are several key factors to take into account when judging just how effective this recovery really is.

The state of the economy

This may be a no-brainer, but it is important. The 2010 Christmas season showed the largest jump in retail sales since 2006, indicating that consumers are slowly expressing more confidence about the future, opening their wallets and checkbooks and businesses are moving to meet that increasing demand. As such, unemployment is slowly falling, creating a net job gain. Residential housing markets are showing signs of stability despite increasing foreclosures, and the GDP is projected to show an increase for 2011.

Federal tax incentives

The federal government’s tax cuts, the sales of treasuries, and aggressive tax deductions aimed at helping small and medium-sized businesses have offered a short-term boost to the economy, though the ballooning national debt is giving rise to fears of inflation.

Global politics

Global politics and international debt crises serve to undermine confidence in what is still a shaky recovery. The tensions in the Middle East, including the current strife in Egypt, as well as the national debt crises of Greece, Ireland, Spain and Portugal challenge the stability of global markets and politics. Instability breeds uncertainty, which makes businesses think twice before investing in extra space.

Credit markets

More lenders are re-entering the commercial real estate market, including foreign banks which serve to create more competition among creditors and more choices for borrowers. There still exists, however, commercial borrowers who are struggling to meet financial obligations as the economy slowly recovers. Lenders are faced with a specific challenge in this situation—face guaranteed losses through a forced sale or foreclosure, or extend deadlines to provide more time for the recovery to take effect. In the commercial market, lenders are increasingly less interested in taking the mark-to-market (priced to sell) losses in favor of “riding out the storm.” This is a fine line however, as choosing to extend deadlines too long could lead to yet another collapse.

Business may not yet be booming, but it is gaining strength. As consumers slowly loosen their purse strings, the need for commercial space will continue to increase. Many businesses that consolidated operations these past few years will soon find (if they haven’t already) that they’ll once again require extra space to meet rising demands, and that means the commercial real estate market should continue to improve with the economy.

Courtesy of Show Appeal Realty, an Arizona real estate brokerage selling Scottsdale Homes and Phoenix real estate.

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