Recession And Debt Drag On Commercial Real Estate

ALEX VEIGA

LOS ANGELES (AP) — Even as the housing market starts to show signs of recovery, fortunes for commercial real estate are looking increasingly grim — and that could spell trouble for the fragile U.S. banking sector.

The weak economy and rising unemployment have forced businesses to cut back on rental space, resulting in declining revenue for many landlords. And tighter underwriting standards and falling real estate values have made it much harder for them to refinance.

The rate at which property owners are defaulting on loans is climbing at an unparalleled pace. Many banks are stuck with shopping malls, hotels and offices buildings they've repossessed and can't sell. Scores of banks have been closed down this year, many of them, including Horizon Bank in Pine City, Minn., and Omni National in Atlanta, because of sour commercial loans.

"The bottom line: defaults are exploding," said Richard Parkus, an analyst with Deutsche Bank. "It's terrible. It's going to be worse than in the early '90s."

The delinquency rate on commercial property loans pooled together into investments, estimated at around $750 billion, hit nearly 3 percent in the second quarter, nearly tripling from where it was at the end of last year, according to Reis Inc.