The Housing Chronicles Blog: Commercial property market following residential market trends

Friday, October 17, 2008

Commercial property market following residential market trends

From the Wall Street Journal:

The next shoe? After years of plunging residential property valuations, commercial real estate is heading into the danger zone as office vacancies rise, stores close and hotel bookings fall.

This could mean another body blow to already struggling financial institutions. Alan Todd, head of research on commercial-mortgage-backed bonds at J.P. Morgan Securities, projects commercial-property losses of as much as $250 billion over the next 10 years, or about 7% of the $3.4 trillion outstanding debt. That would rival the roughly 9% cumulative loss rate during the real-estate carnage of the early 1990s.

Commercial real-estate values have fallen since the beginning of the credit crunch, by as much as 20%, due to more expensive and less available financing. Financial institutions have already taken more than $15 billion in commercial property-related write-downs this year.

There are bullish points. Unlike the early 1990s, the commercial market hasn't suffered years of overbuilding. Defaults on commercial real-estate debt remain less than 1%, compared with more than 10% at the worst point of that earlier collapse. Rents and vacancy rates have so far remained solid, enabling most properties to pay their debt service...

Click here for full story.

1 comment:

Christopher Hain said...

Commercial real estate problems certainly won't be as bad, as deep or as long as the residential RE problem since CRE values are based largely on income. However, since CRE is closely linked to broader economic conditions, how effective our counter-recession measures are will have a big impact. Also, some CRE values have been inflated by the larger economic bubble. I believe this is particularly true with apartment buildings.