Commercial real estate market and capital conditions appear to have weakened again and aren't expected to improve much during the coming year, except for pockets of strong activity and price appreciation in core "gateway markets" and the multifamily-apartment segment, says The Real Estate Roundtable's Q3 Sentiment Survey, released earlier this month.

Whereas an overwhelming 74 percent of second-quarter survey participants judged current conditions to be at least somewhat better than a year earlier, only 60 percent expressed such views in the latest survey. Looking ahead, the percentage of commercial real estate executives who expect conditions to be better one year from today dropped from 69 to 58 between the second quarter and third quarter.

"Our latest survey underscores the fragility and unevenness of the commercial real estate recovery—which closely tracks the pace of the broader U.S. economic recovery and which remains limited to top-notch assets in major metro markets," says Roundtable President and CEO Jeffrey DeBoer.

"Given the pervading sense of uncertainty hanging over the economy, the elections, looming budget, and tax issues awaiting action on Capitol Hill, increasingly complex and overlapping regulatory burdens, and escalating worries about the Euro zone, it's not surprising that commercial real estate executives' expectations for the year ahead are relatively lackluster," DeBoer adds.

Reflecting renewed economic and political concerns, all three indices in The Roundtable's Sentiment Index fell since the last survey, conducted in April. The overall index early this year began to rebound from a sharp drop in late 2011, rising from 59 in the fourth quarter of 2011 to 68 and 70 in the first and second quarters of 2012. In the latest survey, it slid to 63.

Similarly, the "current index" was on a positive trajectory in the first half of 2012, rising from 66 in the first quarter to 71 in the second—only to fall back to 64 in the latest survey.

The hints of cautious optimism that emerged in the January-February survey, producing a future index value of 70, began to evaporate by mid-year, when the Federal Reserve downgraded its projections for U.S. economic growth after three consecutive months of disappointing jobs data. With CRE executives recalling last year's economic roller coaster and expressing concern about a potential repeat of similar shocks this year, the future index tumbled from 70 to 69 to 62 over the first three quarters of this year.

"Commercial real estate continues to face pressure from underlying economic problems, along with an erosion of property values and equity throughout much of the country, and a massive amount of loans coming due," DeBoer says. "This survey confirms that policy action is needed to restore a climate for job creation, to spur long-term business investment, and to help bridge the equity gap hindering the refinancing of hundreds of billions in maturing commercial mortgages."

In The Roundtable's view, foreign capital represents a significant potential source of equity that could help bolster commercial real estate and rebalance underwater loans, thereby easing borrowers' ability to get new financing and avoid potential default or foreclosure. But, the Roundtable contends that an arcane and discriminatory tax law, the Foreign Investment in Real Property Tax Act of 1980, is unnecessarily impeding foreign equity investment in U.S. commercial real estate. As a first step toward reform, The Roundtable urges administrative repeal of a 2007 IRS notice that significantly expanded the law's scope.

The Roundtable also continues working with national real estate trade groups to encourage a more robust recovery of the commercial mortgage-backed securities market, whose roughly $32 billion in projected issuance for 2012 is a far cry from the $230 billion issued at the market's peak in 2007. Given that mortgage-backed debt is used across the United States to finance real estate, a healthy secondary market for commercial mortgages will ensure a broader recovery in commercial real estate markets, the organization contends.

In the latest Sentiment Survey—on both debt and equity availability—fewer respondents than in the Q2 survey saw current conditions as better than those of a year ago. There was a corresponding increase in the percentage of respondents who said they believed debt and equity conditions were about the same or somewhat worse than in the third quarter of 2011.

As for future conditions, there was a similar drop in the percentage of respondents who expect better conditions one year from now, with a corresponding increase among those who expect little change or slightly worse conditions by this time next year.