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By Matthew Quinn
If you think we're in a recovery, then you must not be talking about commercial real estate.
Commercial property values are poised to drop 40 percent, on average, from their peaks in mid-2007, according to the much-watched Emerging Trends in Real Estate report, released Thursday by the Urban Land Institute and PricewaterhouseCoopers. Some sectors could experience declines of up to 50 percent.
"Not surprisingly, the overwhelming sentiment (of) interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging," the report said.
To put the loss of value in some context, it would mark the worst commercial real estate decline since the Great Depression, according to the survey of industry developers, lenders, investors and consultants.
Retail and office properties stand to suffer the most, the report found. However, a growing population of 20-somethings should help the apartment sector recover sooner than others.
Unfortunately, that recovery will likely come too late for some property owners and investors. For example, there are $3 billion of loans included in five commercial mortgage-backed securities financing the 2006 buyout of Stuyvesant Town-Peter Cooper Village, the biggest apartment complex in Manhattan, that are in danger of default, according to real estate research firm Reis, Bloomberg News reported earlier this week.
"The property is nearing depletion of interest rate reserves and will be unable to make debt payments without capital injection," Reis said.
All of this, of course, is bad news for banks worldwide that have billions of dollars in U.S. commercial real estate loans sitting on their balance sheets. Further big markdowns could tighten the already skittish credit markets and stifle what is already looking to be a slow economic recovery.
And, according to the report, recovery in the commercial real estate industry won't begin to take hold until U.S. banks are healthy enough to foreclose on, or strike deals with, overextended borrowers.
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