This is the next shoe to drop on the U.S. market along with retail commercial space. The #2 in the retail space looks like it might be going under because of their lack of sufficient income to service their existing debt. Over the next few years we are going to see a massive amount of 10 year commercial loans come due when the lenders are pulling back and fixing their respective balance sheets. I believe we will see some sort of government sponsored commercial loan program. Associations close the the commercial real estate industry have been lobbying to some sort of bailout.
News:
U.S. commercial real estate activity slowed to its weakest level in 12 years in the fourth quarter and is headed for another six- to nine-month slump as credit remains frozen, the National Association of Realtors said on Thursday.
Prices on office, retail and apartment buildings, meanwhile, fell 14.9 percent in 2008 to levels last seen in 2005, Moody’s Investors Service Commercial said in a separate report on Thursday. From their peak in October 2007, commercial property prices have declined by 16 percent, Moody’s said.
The NAR’s index of commercial brokerage activity declined 6 percent to 109.2 last quarter from a downwardly revised 116.1 in the third quarter, the industry group said in a statement. It was the lowest reading since the last quarter of 1996, an NAR spokeswoman said.
The index is down 9.1 percent from a year ago, driven by the lack of credit for commercial real estate and as the U.S. recession reduces demand, the trade group said.
The downturn will likely persist as developers try to refinance billions of dollars in maturing loans underwritten on rosy expectations, said Percy Pyne, chief executive of real estate investment and consultant with The Pyne Companies in New York.
“We’re going to have to work through those systematically, and that will be a challenge because of the alleged frozenness in the real estate markets,” said Pyne, who is raising money overseas to purchase U.S. properties at depressed prices.
Borrowers have been able to extend maturing loans for now, but reduced cash flows will force a capitulation in the market and a flood of distressed asset sales in 2010 and 2011, Richard Jones, a partner at Dechert LLP, said in a Tuesday interview.
Increased stress in commercial real estate led the Federal Reserve last week to include the assets in a program to expand new consumer lending, which it also boosted in size to up to $1 trillion from $200 billion. The term asset-backed securities lending facility (TALF) is set to be launched soon.
“A lack of commercial credit is a serious threat to the overall economy,” Lawrence Yun, chief economist at the NAR, said in a statement.
Office and retail markets will likely take the brunt of the slowdown as consumer spending softens and unemployment rises, the NAR said. Retail has been the worst performing type of commercial property, with delinquencies soaring more than 800 percent in the two years to January, to 0.91 percent, according to JPMorgan Chase & Co.
In offices, vacancy rates will probably rise to 16.7 percent by the third quarter from 13.4 percent in the year-ago period, according to NAR projections. Retail vacancy rates may climb to 13.4 percent from 9.8 percent in the period, it said.
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