Commercial Real Estate Slump Not as Bad as S&P Feared
The slump in the U.S. commercial property market didn’t quite plumb the depths of the downturn in residential real estate, but although we see signs that home prices are nearing the bottom, commercial real estate could fall further.
Despite a surge in foreclosures in the U.S. commercial real estate market, there were fewer defaults in commercial mortgage-backed securities (CMBS) than Standard & Poor’s Ratings Services originally expected. We still see fundamentals in the market declining—if at a slower pace—and we might see more delinquencies in CMBS. In the first quarter of 2010, foreclosures totaled $3.6 billion, the most since 2001 and 48% higher than in the fourth quarter of last year.
At the same time, we’ve seen some CMBS issuance—a fraction of the peak in 2007, but already exceeding 2009’s total—with most deals involving less-risky, lower-leveraged loans in pools that are much smaller.
The problem is severe but not quite as bad as in the residential market, and at this point it doesn’t look quite as bad as we thought it might be. – Standard & Poor’s Chief Economist David Wyss.
Although lenders’ losses haven’t been as severe in commercial real estate as they have in the residential markets, small and midsize banks have been hurt most because they made the bulk of construction loans and held the mortgages on strip malls and suburban office parks, where prices have dropped more than in city commercial space. Still, we believe new issuance of CMBS is unlikely to return in earnest until fundamentals in the commercial property markets stabilize further.
