The Wall St. Journal reported today that the commercial property downturn isn’t expected to be nearly as steep as the free fall in the residential housing market.
During the current downturn, commercial real-estate values are expected to fall 20% from their recent peaks, in contrast to residential property, which is expected to drop as much as 40% in some regions from their highs.
According to the Journal, although commercial property sales have been at a near standstill in recent weeks, “lenders and investors are likely to be tempered by the lack of overbuilding in recent years and the ability of most office buildings and other commercial ventures to keep current on their mortgages. That’s partly because commercial properties typically produce income. While millions of American homes are under water because their value has fallen below the amount owed on them, most commercial buildings are generating enough cash to pay off their loans.”
The Journal also noted that most analysts are predicting that “the pain this time won’t come close to the carnage of the early 1990s, when major developers like Donald Trump and Olympia & York suffered financial crises.”
William Tanona, a Goldman Sachs Group analyst, was quoted as saying that while he expects Bear Stearns Cos., Citigroup Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley to take combined commercial-property-related write-downs of $7.2 billion in the first quarter, following $1.8 billion of them in the fourth quarter, most of those write-downs are due to the falling market value of the commercial-mortgage-backed securities on the banks’ books rather than defaults.
In contrast, residential mortgage lenders are suffering mind-boggling losses largely because of defaults. Countrywide Financial Corp., the nation’s largest home lender, which accounts for about a fifth of U.S. mortgage-loan volume, recorded $2.29 billion of provisions for loan losses in 2007, up from $233.8 million a year earlier.
So, less pain for the commercial real estate sector.
Unless the recession gets worse or lasts longer than expected.
Then all bets are off.