On Real Estate: Unemployment pounds commercial market

By Jim Hagerty

Staff Writer

As unemployment rates inch higher, the need for commercial real estate continues to shrink. Property values are dropping quickly, according to stats released this month.

Officials predict a dip in vacant office spaces may exceed 20 percent by the middle of next year, with the jobless tallies largely to blame. Until more people return to work, scores of brokers will keep their fingers crossed in hopes the commercial market doesn’t follow the residential sector into the proverbial toilet.

Another factor that could burst the commercial bubble is a wave of commercial loan defaults that are said to be on the horizon come 2010. The result could be devastating on all fronts.

First, property owners will be forced to walk away from high-dollar assets that will likely fall to banks, which, by turns, will face a mountain of virtually unmarketable properties. Tax revenues would see an even bigger kink in the pipeline.

For some brokers, the silver lining could present the same carrot that is keeping the residential market afloat. Dwindling values mean lower sales prices, and, coupled with an FDIC effort to help lenders keep commercial loans on the books without increasing debts, things could at least remain calm moving into the New Year. The measure will also keep banks from falling.

In short, most of the swelling negativity is likely coming from property owners who, in theory, are losing millions in equity as commercial property values fall. But, experts say, things can only look up as most would agree keeping loans from going into default should be the main concern, regardless of what is happening to values.

At press time, there was about $1.5 trillion in commercial mortgages on the books across the country. About half of that was attached to property values that have fallen below what’s owed on notes. The vast majority will come due within the next five years, representing a significantly scary situation—one that welcomes an improvement on the jobless front and more lending opportunities for enterprisers to start businesses.

Locally, some developers have shelved major projects, some dependent on construction financing and TIF funds. With some financing difficult to come by, some developers are doing what they can to sell to create cushions for when the sun, again, begins shining on the industry.

From the Dec. 23-29, 2009 issue

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