The past several quarters have been quite a ride for commercial real estate. Quarter to quarter, the markets have dodged and weaved. One quarter there are deals to be had, only to be followed by evidence that the market has further eroded.

Credit returns in the following quarter, and then comes news from Real Capital Analytics that the total value of US distressed commercial real estate is now $186.9 billion, includ-

ing properties in default, foreclosure and lender REO. This represents a rise of roughly $20 billion from the previous quarter. So where are we now, and where are we headed?

I continue to hear good news. At recent conferences I've attended around the country, I have heard of and seen the strengthening of certain real estate sectors, particularly health care and apartments. While this strength is not universal, there are an increasing number of bright spots. At a series of lectures at Georgetown University, Thomas Flexner, Citi groups global head of real estate, echoed these sentiments as he noted that companies are issuing equity in hopes of acquiring properties selling at a discount. Sectors benefiting from stocks trading at high premiums relative to their underlying asset values have been particularly active, most notably (and not surprisingly) health care and apartments. Flexner further pointed out that deal making is starting to heat up as a result, with the third quarter representing the most active stretch in the commercial real estate market since 2007.

The recent passage of the Small Business Jobs Act (H.R. 5297) increases the government guarantee on the Small Business Administration's flagship 7(a) loans to 90% through the end of the year. Further, the bill waived fees on both 7(a) loans and 504 loans, the primary vehicles to finance real estate through the SBA. This has set off a flood of pending loans with a reported $500 million on a waiting list and an additional $1.5 billion in loan applications waiting on lenders' desks.

While $2 billion may seem like a drop in the bucket, it could help jump- start the distressed real estate market. Sure, the SBA loan amounts are paltry compared to the $200 billion currently in distress, but it could be just the confidence boost that small businesses need to get moving again. On the downside, it is still unclear what effect President Barack Obama's pocket veto-rejecting a notarization bill that would have made it more difficult for consumers to fight foreclosures that may not have been documented properly-will have on the capital markets in general.

As you well know, many states have taken an active role in limiting or even stopping foreclosures altogether. This time-out will surely prolong the market correction for housing prices and will likely have an impact on the emerging capital markets. While this is primarily a residential issue today, residential leads the commercial markets. Without health in housing, there can be no cure for the commercial real estate markets, either.

So where are we headed? There has been too much talk of the capital markets over the past few years: "If only the capital would come back, the commercial real estate markets would be fine:' But guess what? We lost sight of the basic tenet of real estate: supply and demand. Not the supply of capital, although it is important, but the true fundamentals that drive real estate markets.

No doubt, the brightest market participants did focus some of their attention on capital flows. These were the people who started unloading their assets when the market started its heated cycle in 2005 and 2006. These are also the same people today who have the equity to do deals, the right deals, based on the traditional drivers of value. Demand for product, upside potential in revenues and occupancies and downward pressure on expenses. Want to know where the market is going? Pay attention to what tenants are doing.

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