The slump in the U.S. commercial property market didn’t quite plumb the depths of the downturn in residential real estate, but although there are signs that home prices are nearing the bottom, commercial real estate could fall further.
According to an article published by Standard & Poor’s Ratings Services, titled “U.S. Commercial And Residential Property Markets May Have Seen The Worst Of Their Slumps,” despite a surge in foreclosures in the U.S. commercial real estate market, there were fewer defaults in commercial mortgage-backed securities (CMBS) than the rating agency originally expected.
“We still see fundamentals in the market declining–if at a slower pace–and we might see more delinquencies in CMBS,” S&P says in the article.
As the U.S. economic recession spurred job losses and store closings, the commercial property market suffered sharp reductions in construction and steep decreases in prices. But although prices tumbled 39 percent from their peak–an even bigger drop than seen in residential real estate–the decline was tempered because there aren’t as many commercial mortgages as there are residential loans, the article said.
In addition, loan-to-value ratios in the commercial market weren’t as high as those in the residential sector as lenders learned from the drubbing they took in the late 1980s.
“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 said. “There’s a more normal pattern in CMBS and commercial real estate because commercial real estate has always (been) a very cyclical business, and this has been a really bad cycle.”
Amid diminished demand for new strip malls, office buildings, and the like, companies with well-positioned portfolios will probably benefit, in S&P’s view, in what could be an active year for debt sales by REITs and homebuilders. After a six-month dearth of issuance leading up to March of last year–during which there was no issuance by REITs–Standard & Poor’s rated $9 billion in REIT debt from June to December 2009, and sellers matched that amount in first half of 2010. REITs are using much of this debt to build war chests to take advantage of opportunities that arise.
Source: Standard & Poors, www.standardandpoors.com