Is commercial real estate in danger of the credit crunch?

Commercial Real Estate Agent

Depends on who you ask is the simple answer.  Many commercial analytics are showing a property decline in parts of the country, although others are showing a general increase.  No matter who you ask the answer could be different depending on how they evaluate their data.  Apartments have decreased, Retail property has increased, Industrial sites have increased, Raw Land has decreased - but some raw land is classified residential in some studies even if it is development land for subdivisions.

The value of commercial real estate as a whole,  which nearly doubled in the past seven years, is now starting to decline due to the credit crunch, according to a report set to be released today by Moody's Investors Service.

The report found that the value of commercial property declined 1.2% in September from the previous month. Particularly hard hit were apartments in the West and office property in most states other than California.

Some surveys indicate prices are still rising. For example, commercial property appreciated 2.2% in value in the third quarter, according to an index published by the National Council of Real Estate Investment Fiduciaries. NCREIF looks at appraised value while Moody's bases its values on actual sales, according to Moody's executives.

 In any event the commercial sector has only been hurt with issues in lending and doesn't sport the high foreclosure rates found in residential. The default rate for commercial mortgage-backed securities is about 0.4%, compared with a 20% default rate for subprime, or high-risk, home loans, the hardest hit segment of the residential mortgage market. And commercial rents in many markets continue to rise.

Tad Philipp, a Moody's managing director, says he wouldn't be surprised to see the commercial-mortgage default rate double or triple, but he notes that still won't be "alarming" because historically the default rate is about 1%.

Ryan Haddock

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