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US commercial property values now at lowest for seven years, latest figures show

The Moody’s/REAL Commercial Property Price indices fell 1.5 % in October from September to the lowest since August 2002.

Prices were down 36% from a year earlier and are now 44% below the peak in October 2007, Moody’s Investors Service said.

The gloomy news follows predictions from commercial property brokers, including Jones Lang LaSalle and Grubb & Ellis, that office vacancies may approach 20% next year as employers hold off hiring.

‘The number one issue facing commercial real estate right now is the value declines that we’ve seen since prices peaked,’ Matthew Anderson, a partner at Foresight Analytics in Oakland, California.

Also worrying is that an estimated $1.4 trillion of commercial real estate debt is scheduled to mature over the next five years and Foresight estimates that 53% of it is underwater, meaning the value of the property is less than the mortgage.

Commercial property values may decline by a total of 50% from the peak to the bottom, Anderson added. ‘This is the worst that we’ve seen since World War II,’ he commented.

He also predicted that delinquencies for commercial real estate mortgages held by banks may increase by 5.6% in the fourth quarter of 2009 and reach 8% next year.

The delinquency rate for US commercial mortgage-backed securities rose to 4.47% as of the end of November, Moody’s Investors Service said.

That’s almost six times the rate of 0.75% a year ago.

And last week the Mortgage Bankers Association reported that delinquency rates continued to rise in the third quarter on properties held by all but one of the five major commercial real estate investor groups tracked by the MBA. Defaults were the highest among holders of bank, thrift and CMBS loans.
Meanwhile, in its 2010 outlook for structured finance released this week, Fitch Ratings predicts that, as a result of protracted illiquidity and refinance risk, CMBS loan delinquencies are projected to increase by 6% by the first quarter 2010 and as high as 12% by the end of 2012.

Recovery in the commercial real estate sector will lag the broader economy, with operating cash flows expected to decline across all property types over the next 18 months to two years, Fitch said.