The commercial real estate slump is bottoming out thanks to growing confidence in the economy, writes lawyer and journalist James B. Stewart.
The Conference Board said recently that its index of consumer confidence in May grew for the third month in a row, Stewart says in Smart Money.
Furthermore, other data suggest that rents and property values are stabilizing.
And unlike most subprime borrowers, many big real estate borrowers have the means to get banks to refinance and avoid outright defaults.
“I think the worst is likely over,” Stewart says.
Nevertheless, the sector isn't without challenges.
The default rate for commercial mortgages held by banks in the first quarter rose to its highest rate since 1992 and is expected to keep climbing through 2011, according to a study published by Real Capital Analytics, Reuters reports.
The default rate for bank-held commercial mortgages reached 4.17 percent in the first quarter, up from 3.83 percent in the fourth quarter 2009, according to the real estate research firm.
Falling property values, high vacancy rates and low rents should push that rate past the 4.55 percent default rate reached in 1992 before year-end and peak at 5.4 percent in 2011, Real Capital Analytics reported.
While rents are stabilizing, lucrative leases signed during 2006 and 2007 are now expiring, which will weigh down the sector.
“Those prevailing rates in the market are going to be lower than what's expiring,” says Sam Chandan, Real Capital's global chief economist.
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