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S&P Explores Whether the Worst Is Over For The U.S. Property Markets

Source: Standard & Poor's

Posted on 24 Aug 2010

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The slump in the U.S. commercial property market didn't quite plumb the depths of the downturn in residential real estate, but although there are signs that home prices are nearing the bottom, commercial real estate could fall further, said an article published by Standard & Poor's Ratings Services.

The article, which is titled "U.S. Commercial And Residential Property Markets May Have Seen The Worst Of Their Slumps," says that despite a surge in foreclosures in the U.S. commercial real estate market, there were fewer defaults in commercial mortgage-backed securities (CMBS) than we originally expected. We still see fundamentals in the market declining -- if at a slower pace -- and we might see more delinquencies in CMBS.

As the U.S. economic recession spurred job losses and store closings, the commercial property market suffered sharp reductions in construction and steep decreases in prices. But although prices tumbled 39% from their peak -- an even bigger drop than we saw in residential real estate -- this was tempered because there aren't as many commercial mortgages as there are residential loans. In addition, loan-to-value ratios in the commercial market weren't as high as those in the residential sector as lenders learned from the drubbing they took in the late 1980s.

"The problem is severe but not quite as bad as in the residential market, and at this point it doesn't look quite as bad as we thought it might be," Standard & Poor's Chief Economist David Wyss said. "There's a more normal pattern in CMBS and commercial real estate because commercial real estate has always a very cyclical business, and this has been a really bad cycle."

Amid diminished demand for new strip malls, office buildings, and the like, companies with well-positioned portfolios will probably benefit, in our view, in what could be an active year for debt sales by REITs and homebuilders. After a six-month dearth of issuance leading up to March of last year--during which there was no issuance by REITs--Standard & Poor's rated $9 billion in REIT debt from June to December 2009, and sellers matched that amount in first half of 2010. REITs are using much of this debt to build war chests to take advantage of opportunities that arise.