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Commercial Real Estate Fears

Ian Cooper's Market Insider

Written by Brian Hicks
Posted June 22, 2009

Think commercial real estate fears of fallouts and failures are overblown?

Reis Inc. — an impartial provider of commercial real estate performance data — says vacancy rates at strip malls, neighborhood centers and regional malls are increasing at rates not seen in 30 years. "We've never really seen deterioration of this order in occupied
space since 1980. We don't see much in expectations for improvement throughout the rest of this year and next year."

But that Reis forecast assumes positive job growth and an increase in consumer spending. So even Reis may be a bit off, as unemployment could continue to rise.

Truth of the matter, the problem could get much worse. Between now and 2011, for instance, about $814 billion in commercial real estate loans will mature, and will need to
be refinanced - an issue that could make commercial real estate the next shoe to drop in this decline.

The head analyst of commercial mortgages for Deutsche Bank believes commercial real estate won't recover until at least 2017. "The froth is still working itself out. We are currently in something which is comparable to what we saw in the 1990s and potentially worse."

Worse, "U.S. commercial real estate could fall by more than 50 percent from the peak in 2007. The number of new loans that are becoming delinquent each month are defaulting at
rates between 5 percent and 8 percent per year, with the most loosely underwritten loans of 2007 defaults at 8 percent per year. We are not only not approaching stability, we are at a period of maximum deterioration."

So how do you play the coming fallout? Steve Christ has four ways.

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