By: Stephen Windell, Mid-South Senior Credit Products Officer for Commercial Real Estate Banking, Bank of America

This spring, global markets were relieved when Greece — where the European debt crisis began — reached a historic debt restructuring agreement. Meanwhile, the European Union’s new fiscal treaty strengthened its fiscal oversight of the eurozone and bolstered global confidence in the Union. For now, Europe had avoided a world-altering meltdown.

Across the Atlantic Ocean, Europe’s debt crisis wasn’t lost on the U.S. commercial real estate market, where it added to the persistent uncertainty that made sponsors and issuers cautious just as the sector’s fundamentals were improving. Commercial real estate is poised for an economic expansion, but ripples such as Europe’s fiscal woes can make markets more cautious and directly impact occupancy and the overall commercial real estate outlook. In cases such as these, there is a fine line between stagnation and opportunity. If the former happens, recent gains in responsible land use could slow

The debt crisis and related recession overseas revealed the key structural weakness of the European Union, which has little fiscal control over its member nations. True, some relief came through the decision by the European Central Bank to lend €600 billion at low rates to European banks. In addition, the U.S. Federal Reserve freed up liquidity by easing credit for European banks.

But the problem now is Europe’s recession and its effects on its countries’ debt burdens. Liquidity could eventually find its way into the European economy, but countries will need to sell about $1 trillion in debt in 2012. Any reluctance by investors could trigger more market unease — and trample the blossoming U.S. commercial real estate market just as it is ready for a comeback.

According to the National Association of Realtors, 2011 saw positive demand across all property types for the first time since the financial meltdown four years ago. U.S. banks increased their commercial property lending in the fourth quarter of 2011 for the first time in almost two years. While the sector still lags business investment, the commercial real estate market’s mood can be described as cautious but positive

The biggest opportunities remain Tier One cities, with major markets seeing an improvement and remaining attractive to European capital. Even so, despite the cash that banks have, the cost of capital is higher because of the strengthening of banks’ balance sheets. Today commercial real estate borrowers are being asked to clear additional hurdles, and lenders are seeking ancillary business – from treasury management to investment banking – to bolster their returns.

Given this environment, a long European recession could hurt commercial real estate lending in the U.S. As recent history has shown, any period of global uncertainty and higher capital costs makes lenders more cautious. Consider that a European recession affects demand for U.S. goods in that market along with the risk of pullback in financing by domestic U.S. banks.

Such a recession also could present opportunities, such as REITs and opportunity funds acquiring assets outside the U.S., including in Europe. But the risk to the U.S. commercial real estate market is real, and both borrowers and lenders must monitor the situation closely to ensure projects not only remain on track but maintain the appropriate controls for responsible land use.

This article was provided by Bank of America Merrill Lynch, a Platinum level sponsor for ULI Charlotte, written by Stephen Windell, Mid-South Senior Credit Products Officer for Commercial Real Estate Banking.