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Some Investors Expect Downturn in Commercial Real Estate Market

[Nov 19, 2007.]


Not so long ago, investors predicted that the residential real estate market would suffer a significant setback. They were right on that score - the housing market is at its lowest ebb in some 16 years.

Now, some investors are predicting that the commercial real estate market will suffer a similar fate. They're expecting an increase in defaults in the $850 billion commercial real estate sector, a market which includes such structures as hotels and office complexes. Speculators are targeting the CMBX index, causing yields on the index to rise sharply over the past month.

Such investors are betting that the crisis in the subprime loan industry will affect the broader economy and dry up cash for commercial loans. In fact, worries about recession have heightened in recent weeks. Still, the Federal Reserve has promised to do everything possible to prevent recession and, so far, at least, the crisis in the housing industry has not affected the rest of the economy.

However, other analysts are quick to point out that the commercial sector might be saved from the fate that befell the residential market.

At this point, delinquency rates on commercial loans are now around 0.32%. That number is expected to increase to 2% in the next few years. In sharp contrast, delinquencies for subprime loans are now approaching 16%--that's 4 times what they were just 2 years ago.

While prices for homes have been plummeting, property values and rents for commercial property continue to increase. In fact, demand for store space in malls remains brisk. As a result, the largest American owner of malls, Simon Property Group, has seen its operations funds rise 13%.

The housing market is not expected to experience a turnaround until the middle of 2008. As a result, the housing crisis could become a key issue in next year's political races.

Julie Ann Amos
November 19th 2007

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