Is that light at the end of the tunnel?

Most people would agree the good news is that 2009 is half over. The first two quarters have been tough on businesses and individuals. While the balance of 2009 will be far from rosy, it should be an improvement.

The Index of Leading Economic Indicators is up. Recovery from this very deep recession will be slow and most likely shallow. Real growth for the U.S. economy will likely be 1 percent to 2 percent annually vs. the 3 percent that we have averaged over the last 15 years. But this could be an uneven recovery, with some sectors up while others are down. We see this in the conflicting and changing economic data reported one month and changed the next.

Whether you agree with the Obama initiatives or not, I think the U.S. did not have a choice. We were on the very edge of the precipice and nearly tumbled over. We have stepped back from that edge, largely due to the huge monetary fiscal and stimulus initiatives. But the concern is that we don’t lurch too far in the other direction. This is tricky business. Time and a gentle hand are critical to navigating these currents and negotiating the proverbial “soft landing.”

In the commercial real estate world, there is an increasing level of activity, but mostly smaller deals, along with quick, short renewals of leases. Everyone is cautious. Most tenants feel that the economic crises should result in lower rents and landlord concessions. Landlords don’t see it that way. Their costs have not gone down, and they are facing a wall of debt that will be very difficult to roll over or refinance.

The entire commercial real estate sector is over-leveraged. We need a soft landing, but like the overall economy there will be winners and losers, peaks and troughs, fits and spurts. A long-practicing commercial appraiser stated that many of their recent commercial appraisals were coming out with values 30 to 50 percent lower than appraisals in the file from two, three or five years ago. Historically low capitalization rates resulted in inflated property values and too much debt.

Waiting for job growth

There is a new sheriff in town, and the new conservative rules will address the excess leverage head-on, but many property owners will have to secure additional equity to refinance. This is significant because most commercial properties have been financed with 10-year “balloon” loans.

The balloon loan is a structure under which the amortization period might be 20 or 25 years, but the loan comes due in 10. It can be refinanced at that point. When property values are appreciating, this method works nicely. But when property values are declining — not so much!

Add to the mix the retraction in the general business sector with layoffs and uncertainty, then tenants may not renew or want less space or will stay in the same space but at reduced rents.

So far for the landlord, not only is the property’s value under stress, the cash flow may be too, which puts more pressure on the property value. If a multi-tenant property does not have a majority of the space leased by long-term tenants, this becomes a dicey proposition.

At a recent meeting of the Boston chapter of the Society of Industrial and Office Realtors, the panel discussion touched on several items.

The growth in money supply is currently growing exponentially. At some point, if not reeled back in, this will be inflationary. (Think late 1970s.) The compounding growth of the deficits will need to be paid down some day.

The current decade, since 2000, has had zero job growth. The million jobs created have disappeared. In fact, by 2010 it may be negative. With no measurable job growth, we have a surplus of space in retail, office, commercial and industrial.

We cannot project the bottom of the rental market. Maybe 2011. We know that consumer confidence has to rebound (60 percent to 70 percent of the economy) and there needs to be measurable signs of organic job growth.

The commercial mortgage-backed securities, “conduit” loans, are starting to come due. The conduits are not functioning, are not making new loans and are not for the most part rolling over existing loans. The life companies, pension funds and commercial banks cannot take up the slack.

So while we are seeing some light at the end of the tunnel, we are not sure how long the tunnel is or the slope we have to climb. Put on your hiking shoes.

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of CharteredSurveyors (FRICS). He can be reached at