(for a print version, click here) One of the more frustrating and dangerous summers in recent memory is finally coming to a close, and now it’s time to figure out how to finish out the year. In the past two months, we have experienced a significant stumble in the Commercial Mortgage Backed Securities (CMBS) market, a frightening game of brinksmanship with the U.S. federal debt ceiling, continued European debt problems, a Washington, D.C. earthquake and an historic hurricane plowing through most of the Northeast. It’s a wonder that no one has spotted the four horsemen of the apocolypse barrelling towards us. So where are we now, and where might we be going in the months ahead? One source of insight comes from the National Association of Real Estate Investment Managers’ (NAREIM) and FPL Advisory Group’s seventh quarterly pulse survey of real estate investment managers released this week for the third quarter of 2011. Based on a survey conducted with managers in early August, the pulse attempts to uncover a “real-time” picture of commercial real estate investing in the U.S. The pulse includes a confidence index that attempts to put together a qualitative view from respondents of the prospects for commercial real estate. It reflects real estate’s rising and falling activity – and not coincidentally – mirrors the overall economy rather closely. At the beginning of this year, for example, the index climbed as asset values rose, capitalization rates shrunk, CMBS orgination ramped up, and transaction pipelines filled. Optimisim began to fade in the second quarter as fundamentals didn’t catch up with capital markets expectations – and the last two months we have dropped to the lowest levels of confidence in the short history of this index. But what’s driving it? How much of that drop is due to the general economy and how much is based on weakening prospects for commercial real estate? I recently spoke with a few members of NAREIM to get their perspectives on the state of investment managers’ confidence. According to George Pandaleon, President of Inland Institutional Capital Partners, “The macro-economic factors are driving quite a bit of this; perhaps 60% of the drop in confidence is based on the general economy and 40% on real estate specific issues. So you have to look at the volatility and uncertainty in the broader market to understand the movements in this index.” George continued, “In the first quarter capitalization rates and transaction pipelines were leading operating fundamentals but there was a belief that job growth and retail performance would begin to improve. This summer, however, things got a bit shaky.” So many things have been troubling this summer, that it is difficult to pin any one of them down as the factor bringing down confidence. Pat Halter, CEO of Principal Real Estate Investors points to uncertainty and volatility as the main culprets. “People are slowing down on acquisition, in great part because they worry there may still be some more price discovery to go before everything stabilizes. This is less about the prospects for commercial real estate, and more about the overall uncertainty and volatility in our economy.” Matt Reidy, Senior Managing Director of Fremont Realty Capital doesn’t disagree, “There will be some questions asked about the prices paid in the first half, especially as re-forecast expectations of rent levels, occupancies and Net Operating Income are compared to original pro-formas. We’re also seeing the beginnings of some re-trading on deals that weren’t completed before the summer. There will be some necessary discounting on these and other deals in the pipeline to arrive at a closing.” That’s not to say that the environment is disastrous. As George pointed out, “If you look at the last three years, we are still better off than the crash – it’s just so volatile. Consider the uncertainty of the regulatory environment – it all seems to be up in the air. There is such a high level of uncertainty about what the government is going to do and when they will do it. The sooner they come to some kind of decision on regulation, the sooner business leaders will be comfortable that they can proceed with their long range plans.But as long as they don’t know which way the wind is blowing, they will hesitate to do anything big.” Will there be more certainty and less volatility in the coming months? It’s impossible to predict anything these days, but with August unemployment numbers sticking at 9.1%, a hobbled CMBS market, and a gridlocked federal government, 2011 will certainly not be known as an easy year for real estate investors. After a strong first half, however, and values still much improved over the lows of recent years, it is unlikely to be seen as a complete disaster. Just as Hurricane Irene was difficult to endure, but not impossible to survive, the outlook for the final stretch of 2011 is challenging but not impossible. Matt may have put it best when he observed, “Up until a month ago – I felt like Frodo at the end of the third book of Lord of the Rings, with the ring destroyed at Mount Doom and everything certain to work out for the best. Now it feels like we’re back to the half-way point in the trilogy, and there’s still a long way to go.”