Commercial Real Estate Teetering on the Edge?

So far there has been a great deal of news coverage of the residential real estate meltdown that began the current severe recession. However, little focus to date has been on the commercial real estate sector which is likewise teetering on the edge of a meltdown due to the huge drop in business expansion plus businesses suffering major reductions in cash flow and overall business revenues. Around the Hampton Roads area for instance, much office and retail space remains empty after months and months on the market just as quantities of new space are about to become available as construction of projects begun before the economic collapse near completion. It could become a very nasty situation if the economy continues to languish or get worse with banks being only some of the parties about to suffer major problems. Here are some highlights from MSNBC:

*

Even as banks grapple with rising foreclosures, many lenders have something else to worry about: A rising tide of potential losses from commercial real estate loans that could reach into the billions. Delinquency rates and defaults on office and retail buildings and hotels have more than doubled in just six months. For apartments and industrial buildings, the rates have increased more than 80 percent, according to Reis Inc.

*

While homeowners are defaulting at almost four times the rate of commercial landlords, the sudden spike in late payments has many industry insiders worried about the collateral threat to the economy and financial system. Nearly $73 billion worth of commercial real estate loans are in some level of financial distress, according to Real Capital Analytics.

*

"Because of the severity of the economic downturn, now the pressure ... for commercial real estate, is much higher," said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services. The economy has forced many businesses to downsize and others like Linens 'N Things and Circuit City to go out of business. That's left behind empty storefronts, office buildings and warehouse space.

*

Landlords are finding it hard to attract new tenants. Increasingly, they are slashing rents or offering incentives like money for tenant renovation. Tenants, likewise, have also become more aggressive about demanding concessions from landlords. Starbucks, for example, recently pressed its landlords to renegotiate the rents for leases at company operated stores.

*

Overall, some $270.5 billion commercial property loans are expected to come due this year alone, said McLaughlin, a financial analyst for Reis. And it's likely many borrowers won't be able to refinance.

*

[S]ales of foreclosures and other distressed properties can create a downward spiral for similar properties in the neighborhood. Vacant commercial buildings, like vacant homes, also invite vandals and vagrants.

*

And through all of this, my former wife - and judges who have never been in private practice - can't understand why my income is down significantly.