Commercial properties may or may not be the catalyst to the real estate market’s overall recovery, but San Francisco has become the paradigm of how economic growth spurs it. According to a recent piece in the San Francisco Chronicle, restaurants in the city have enhanced local retail real estate.

The relationship between retail real estate and the economy, both jobs and tourism in the city’s case, is symbiotic. An increase in technology firms has created more jobs in the region, and thus the overall purchasing power. Over the past two years, 300 eating, drinking, and other food-related establishments have sprung up in different sections of the city, and the purchasing power and tourism bring in customers. The proliferation and success of restaurants, as well, has created a greater demand for street-level real estate in the city, according to Cushman & Wakefield.

The types of restaurants, additionally, tend to be more toward the upscale end. About the types of restaurants San Francisco is seeing, senior managing director Vikki Johnson at Colliers International told the press:

“People are giddy about seeing the new concepts being developed by chefs and restaurateurs who already have a huge fan base. These aren’t sandwich shops. They’re very competitive businesses with extraordinary expectations.”

While the technology industry has been reinvigorating San Francisco’s economy, tourism brought in an additional $8.3 billion in 2010, according to the San Francisco Travel Association. Although retail real estate has the lowest vacancy in the United States already, it is expected to see more of a drop in San Francisco, with rents increasing with the demand for business.

Real estate markets, both commercial and residential, continue to suffer across the nation, and the lack of jobs holds them and consumers back. Although San Francisco, even with the success, is still in a state of recovery, the relationship of more and better jobs and the demand for retail real estate should be used of an example of effective economic recovery.

For the past market, the recovery of the commercial real estate market, particularly the retail sector, has been deemed the factor that can pull the nation out of the recession and get the real estate market in general back into good shape. Once jobs are available – and a greater need for jobs often translates to a greater need for office or retail space – more people can purchase homes. A recent article from Reuters, however, indicates that this hope riding on commercial real estate is just a bunch of hype. While retail in major cities is showing promise, prices are 44.6 percent lower than 2007 levels.

Aside from creating a stagnant job market, failing commercial real estate can significantly hurt banks, according to Reuters. Essentially, the cycle goes like this: When values per square foot do not increase, buyers need to default, which can cause community banks – one of the largest holders of commercial properties – to fail. How big of an impact is commercial real estate having? Presently, 446 banks are in danger of failing.

According to Reuters, most community banks are only in business because of the “extend and pretend policy”:

Many banks with big commercial real estate portfolios are hanging on by a lifeline the FDIC threw in October 2009. It allowed banks to extend the maturity date of loans, as long as the borrower was current with the interest payment. The policy is widely known as “extend and pretend,” and has allowed banks to avoid writing down many of their commercial mortgages.

Failure is imminent for many banks, particularly as delinquency rates are 7.7 percent for commercial real estate, land, and apartments. At the same time, if commercial properties cannot help the real estate market recover, then what can? Buying power, as we have mentioned, is necessary for the housing market to improve, and buying power correlates with more and higher-paying jobs.

We saw two weeks ago that commercial real estate in Connecticut took a hit; prices for office space are expected to stay flat or increase. A large complex, Connecticut River Plaza, only sold for $12 per square foot.

Although Connecticut is a microcosm of the commercial real estate market, investors are turning elsewhere. Retail in small amounts, according to the CoStar Group, has stability and lasted through the recession.

Investors of single-building retail, or standalone real estate, look for quality locations and businesses that cater to all customers: banks, discount stores, drug stored, and fast food. Because all such businesses lasted through the Recession, they are considered economical and like a bond with a high dividend. Retail debt, as well, is low cost.

Think about this for a moment. Office space is faltering, and the lack of higher employment opportunities means that service and retail are expanding fields and office spaces are likely content with the space they have. As CoStar mentions, larger retailers have closed stores or pulled out of larger establishments, such as malls or shopping centers, and a discount retailer moved in.

Unlike the recent office space sold in Hartford, retail space may be going at 10 to 20 times this amount. Convenience store space, for example, is going at about $220 per square foot, according to CoStar.

For investors, retail looks like a sound investment: a low cost debt, more consistency, and a high bond-like return. Nevertheless, the office and industrial aspects of commercial real estate should not be ignored. Without jobs, consumers will not have money to spend.

Startups, however, may be the key to job growth. Newly-created companies mean more office space is needed. Once companies – established or beginning – start needing more office space, investors may be more likely to add this aspect of commercial real estate to their portfolios.

Could commercial real estate be the key to influencing home buyers? Perhaps not directly, but companies hiring (and, in return, buying up more office space) decreases the unemployment rate and puts more individuals in better financial positions for purchasing homes.

The key, of course, to purchasing real estate is the need for jobs, and some industries or companies are still tepid to hiring. Industries not following consumer trends, such as tourism from the Post and Courier piece linked, have a greater chance of purchasing space. Education is one such industry, and an article from the Knoxville News Sentinel details a college purchasing vacant space to expand their class offerings. South College purchased a former clothing headquarters and used a significant portion of the space, although more office and warehouse space in the building is empty and for sale.

Presently, 17.6 percent of office space is vacant nationally.

A few weeks ago, we commented on an article by Susan Lawrence, the President of Real Estate Strategies, about the unfounded optimism in the recovery of the housing market. Lawrence essentially stated that, since the beginning of 2009, the real estate market has experienced an ebb and flow pattern: A minor increase, perhaps caused by a first-time homebuyers’ tax credit, is followed by another small drop. The market, then, just ends up staying in the same place.

Buying power by the general public is the second half of her argument, and until fewer than one in ten people are unemployed (and those underemployed earn more) and layoffs no longer loom overhead, the average person has no incentive to purchase a new home.

Foreclosures, additionally, bring down the average price per home and, in some areas, are half of all properties being sold. Even though the crash of 2007 is long past, foreclosures are expected to increase in 2011, counting for about 1.2 million of all homes sold.

Office real estate, a subset of the commercial market, appears to be making a slight recovery, according to an article in the Wall Street Journal. The office market took a sharp hit when the rest of the economy tanked in 2008, and companies gave up large amounts of square feet as they were laying off workers. But just as the job market is showing small signs of recovery, the office real estate market has stabilized, according to the Wall Street Journal story. The article does claim, however, that businesses are giving up more office space and trying to fit more workers into the limited amount of square feet they have.

But the WSJ article also mentions that commercial real estate is considered the “anchor” in the recovery for the economy. Lower rents will mean investors are more likely to purchase office space; increased space available may mean more jobs. In some markets, as the article mentions, this is already happenings, particularly in East Coast cities like Boston, New York, and Washington, D.C. Those on the West Coast, like San Diego and Las Vegas, are still struggling.

In struggling cities, apparently, the lack of buying office space correlates to a poor housing market. In Las Vegas, for example, housing prices plummeted nearly 50 percent since the start of the real estate crash and, most likely, commercial real estate did the same. But stable rents and fewer underwater mortgages mean that investors are more likely to buy property, such as the recent purchase of the John Hancock Tower in Boston.

Nevertheless, according to the Wall Street Journal article, a large hurdle in getting the office market off the ground is reducing the vacancy rate, which is the highest it has been in nearly 20 years. Lower rents and a greater need for workers, however, may change this figure in the next few years.

Commercial real estate is always on the fence. One week, you hear that the market is about it experience its own real estate bubble. The next, you hear about how its affordability is going to help the economy by creating more jobs. The fact is, the market appears to be in a state of uncertainty and, considering the unemployment rate has been hovering around 10 percent for the last year, commercial real estate could go in any direction.

According to an article in the Dallas News, the author states that the present looks like the end for commercial real estate. Why now? The author goes on to reason that commercial properties have jumped 17 percent this quarter – a significant difference compared to a year ago – but the market in general is still 30-percent lower than in 2007.

But, could this be foreshadowing of a crash? It could be. The author mentions that the last time commercial real estate experienced a price increase was 2005 – when real estate was experiencing a housing bubble. Nevertheless, the increase for commercial real estate needs to be the result of a demand by investors and more properties need to be put on the market.

Another factor that the author mentions in indicating a crash is the high rate of delinquent payments. We’ve mentioned this before on our blog but, much like residential real estate in 2007, the first indication of a crisis was falling behind on payments for those unable to meet the amount of an adjustable rate mortgage.

The disparity between now and 2005, as the author explains, is a sharp difference in price; as a result, it appears, owners are reluctant to put their properties on the market, until distinct increases are seen. After all, why sell your property for a loss?

When it comes to real estate, the housing market burst in 2007, went down, and has stayed at a low level for about two years. While this varies in some parts of the country – real estate in New York seems to be picking up – the next shoe to drop is considered the commercial real estate market. Or, will it? In some parts of the country, the demand for commercial real estate is increasing, while in others, such as Las Vegas, the demand is still low. When it comes to inflation, commercial real estate is considered a stable point amidst the storm.

According to the article linked above, commercial properties protect against real estate, their value keeping overall amounts from dropping lower. The author, in fact, describes them, as a “hedge against inflation” and they also help set the pace against inflation. In fact, those creating a varied investment portfolio are advised to add commercial real estate because of its stability. As far as the real estate itself is concerned, the ability for a property owner to adjust rents over time correlates to economic growth.

Unfortunately, this latter aspect is where the commercial real estate market – and in economy in general – is lacking. The state of the economy, including a lack of jobs and a stagnant homebuyers market, has put pressure for rents to lower to keep up the pace of inflation – or, more appropriately, deflation. Rent, in general, has declined over the past 18 months at a rate quicker than the typical inflation index.

Nevertheless, the author predicts that rent on commercial real estate should outpace inflation over the next few years, as the demand for “goods” will increase the pressure for inflation. The lack of job opportunities, however, means that the consumer has little buying power, and this factor keeps the homebuyers market stagnant. Do you think that the market will improve once job opportunities increase, or will it increase on its own?

A few weeks ago, we discussed an article in which commercial real estate might be on the way up. The article talked about more properties being purchased for industrial purposes in Minneapolis. But, perhaps, Minneapolis is only a positive snapshot in a subset of real estate that still hasn’t reached the bottom yet.

According to a recent article, the state of commercial real estate has deteriorated significantly over the past 18 months. In 2007, as the article mentions, the market was in excellent shape. Although with too much spending and taking out too many loans, is this a true assessment? However, the article mentions that even when the residential subprime market declined sharply in 2007, the commercial real estate market was unaffected and, instead, the year saw the highest number of transactions for the entire decade.

Considering the amount of subprime lending and dishonest practices seen in 2007 for residential properties, similar practices extending to commercial real estate might be expected. Up to 2007, banks were increasing their commercial lending and, by the end of the year, 36 percent of their assets were in commercial real estate loans.

However, as the article explains, the economy tanking in 2009 didn’t mean a decrease in commercial real estate – at least on the surface. Companies, it appeared, held on to this real estate in 2009, and now they may be paying the price. April 2010 saw a seven percent delinquency rate, and 17.1 percent of commercial real estate loans were 30 days delinquent. Additionally, the issues go beyond delinquent loans. Businesses may have loans in the process of foreclosure and owners may be under pressure to or have already declared bankruptcy.

None of these are positive signs for the commercial real estate market over all. But, does this look like the bottom or just part of the market’s descent?

Is commercial real estate on the way down or is it on its way up? According to a post we published a few weeks ago, the commercial real estate market was next to crash, with the construction industry going with it. One result of the real estate crash a few years ago was the lack of properties being built. Add the rising unemployment rates seen in 2008 to the present in the picture, and fewer employment opportunities meant fewer commercial buildings being created. But, according to a recent article, the trend may be reversing for industrial businesses.

Many towns want to attract businesses to the area and increase jobs. As a result, the sales of industrial real estate – a subset of commercial real estate – have been increasing in Minnesota and other parts of the US. This has been the result of tax incentives and favorable loans. Instead of renting more office or industrial space, a company will purchase a building to expand its facilities and services. Generally, local governments have been offering lower prices for properties to be purchased and tax incentives for more jobs to be created, according to the article linked from the Star Tribune. As a result, these two factors have resulted in increasing sales of industrial properties in Minnesota.

But this increase isn’t across all fields for employment. Rather, Minnesota has seen existing companies in the state expanding their manufacturing facilities. Because more space is needed, a company will purchase a new building and offer more industrial jobs to the area.

As far as commercial real estate overall is concerned, fewer properties are being built from the ground up. Rather, existing structures that have been empty are being purchased by manufacturing companies expanding their facilities and services. In time, this may translate to newer buildings needing to be created for more jobs.

Personal properties appear to have stabilized somewhat during the past three years since the crash of the real estate market, but, as we’ve seen in previous posts, the failures of the real estate market might not be over. Recent real estate predictions state that commercial real estate may be lurking around before hitting small and medium-sized banks with unpaid loans. Although adjustable rate mortgages (ARMs) don’t appear to affect commercial businesses and developments, many of these businesses have loans from small to medium-sized banks. And, with unpaid loans due to a lack of business, the commercial properties will result in several bank failures. In fact, this may start as early as the end of 2010.

The loss is already anticipated to be $300 million, although this is only an estimated figure at the time. Commercial properties range from office buildings to stores and what might result from a commercial real estate crash would mirror the rental aspect of the real estate crisis. Landlords unable to pay their mortgages due to a lack of renters eventually had to evict all tenants from not paying their mortgage. At the moment, many of these commercial buildings are empty or are partially built.

What could possibly help this situation? Already, on the distant heels of the TARP fund, is a $30 billion fund proposed by President Obama, according to the linked article above. This amount would be geared toward small to midsize community banks experiencing their share of financial troubles. This amount would be designed to boost lending to small businesses – those needing loans to start up shop. The fund, however, has not been approved by Congress as of yet. One possible destination for the amount is the federal Small Business Administration, instead of banks. The federal Small Business Administration would then decide which businesses receive loans.