Commercial Real Estate May Be Doomed

By Kevin Grewal, Editorial Director at www.SmartStops.net

NEW YORK (TheStreet) -- As residential real estate foreclosure numbers seem to be subsidizing and rates of negative equity are easing, the residential real estate sector appears to be stabilizing, however, the commercial real estate sector is a different story.

The troubles in the commercial real estate markets continue to unwind, which is evident in the most recent problems seen by the Dubai World. In fact, some experts suggest that the default rate in speculative-grade debt will hit 12% to 14% by the end of the year, marking a 28-year high. What makes this predicament even more unique is that it is not only the small business owner who is defaulting on payments, large companies with assets north of $100 million are as well.

One reason the sector is struggling is the direct correlation of cash flow in commercial real estate to macroeconomic factors like the labor markets. Labor markets continue to remain weak. The most recent data published by the Labor Department illustrates that the number of newly filed unemployment claims continues to rise by numbers higher than expected by analysts. As long as this trend continues, cash flow will likely remain weak in commercial real estate.

A second reason the sector is hurting is due to the lack of available credit. In prior years, one was able to refinance and extend out payments, but this is no longer the case. Many large and healthy banks are reluctant to lend and are hoarding cash to repay TARP funds and build a protective barrier for 2010.