As many of you know who have seen my presentation on the current residential real estate market, I think we've hit a bottom for residential. I'm also quick to say that the market may fluctuate downward a few more percentage points, but that the freefall is over and the market will remain somewhat flat for the next 12 months. This creates a great deal of opportunity.

But what about the commercial real estate market; has it hit its bottom yet? There are two major factors that are impacting the commercial market: Unemployment and the credit markets. Let's first take a look at unemployment and its effect.

The national unemployment rate in October reached 10.2% for the first time since 1983. October made 22 straight months that the nation's economy has shed jobs, the longest streak for 70 years. However, over the last three months, the number of jobs lost has been declining. Still, the mounting job losses affect the demand for commercial real estate space and pose a major concern for potential buyers. Job losses have an indirect effect on residential real estate because a job loss makes it hard for a person to pay the mortgage or buy a new home. But job losses directly impact commercial real estate. For example, companies that downsize require less office space and therefore, offices go vacant.

One of the biggest barriers to the commercial real estate market recovery, according to a LoopNet (a San Francisco-based operator of online commercial real estate services) survey, is a lack of access to debt financing.

Washington is aware of this issue and its impact on commercial real estate. Federal bank regulators have been working on issuing guidelines that would encourage lenders to rework troubled commercial real estate loans, leaving it easier for new loans to be made. The chairman of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair, said, "We are encouraging banks to restructure these (troubled) loans." The regulators are bracing for more bank failures, particularly the small banks that have high exposure to commercial real estate loans. Commercial real estate loans are the second largest loan type after home loans. More than half the $3.4 trillion in outstanding commercial real estate debt is held by these banks. Ms. Bair said, "Failures in 2010 would likely track the levels in 2009," which has seen 98 banks collapse so far. Federal Reserve Governor, Daniel K. Tarullo, said, "The loans seeing the most problems are construction and development loans, not investments on existing properties. One reason is that construction and development loans are likely not bringing in any income or revenue for the borrower, making it much easier to fall behind." So it's clear that the FDIC and Federal Reserve are being pro-active regarding this issue and hopefully, that will allow sound loans to continue to be made, but that is yet to be seen.

Values and the number of transactions have certainly suffered in 2009. There has been a steep decline in transaction volume during the first seven months of 2009; roughly $22.4 billion in commercial real estate properties have traded hands, about one fourth of the $99 billion in property sales during the same period in 2008, according to REO Capital Analysts of New York.

Investors report that property values have been hit hard. The hardest hit sector has been undeveloped land which reports a sharp 20.6% drop in valuations just over the past six months. The vast majority of investors anticipate that values will remain flat or experience a further decline over the next six months, with hotels the most likely to experience a decline in value, followed by office space, then by retail and lastly by mixed-use property. The most optimistic are apartment investors, as one in five expects values to begin increasing over the next six months.

There are signs that the investors that have been sitting on the sidelines because of the effects of the deep recession and the credit crunch are preparing to jump back into the commercial real estate market. Results of a recent online survey conducted by National Real Estate Investor newsletter and Marcus & Millichap Real Estate Investment Services found that slightly more than half the respondents (56%) plan to increase their commercial real estate investments within the next 12 months, up from 51% in the fall of 2008. The recent numbers show positive movement, and we're seeing more buyers and sellers wanting to execute transactions as the pricing gap begins to narrow.

"The good news is that it looks like the worst is over," says Hessam Nadji, Managing Director at Marcus & Millichap. Typically, the commercial real estate sector lags behind the national economy by 6 to 9 months, Nadji notes. One encouraging factor is that there is a lot of capital on the sidelines. Once confidence improves, that capital returning to the economy should be very positive.

So if I was hard pressed to give you an answer to the question "Has the commercial real estate market hit the bottom?" I would have to say, not quite yet.