No Bottom In Commercial Real Estate Until 2010 – 2011

The good news is that the end is near, and I’m not talking about the rapture. Mercifully (unmercifully?), Moody’s said Friday that commercial real estate is going to get a whole lot worse before it gets better, but that it WILL get better. Unfortunately, that won’t be until 2010, at the earliest.

For now, Moody’s says that the deepening recession and the reduced availability of financing have heightened the risks for the US commercial real estate sector no kidding. The ratings agency cites the retail sector as most exposed to very tight-fisted U.S. consumers, but the gloomy picture they paint is the product of a very broad, thick brush: they say virtually no asset class will escape unscathed.

The hotel sector is clearly in the middle of the storm, as is retail, but demand for office space is also declining in many markets and industrial properties have been adversely affected by slowing trade and retail sales. Even multifamily (apartment) properties face trouble. It’s true that everybody needs a place to live, but Moody’s says there will be fewer “everybodys”.

Reduced household formation, a fancy euphemism used to describe the impacts of children moving back in with parents, other parents moving in with their kids, friends sleeping in closets, and in some cases, dogs and cats relinquishing the kennel to their masters, all combined with growing unemployment and the increasing supply of rentals in the “shadow market” of foreclosed homes, will create stress even at this level in Maslow’s hierarchy. For a little more dark humor on this topic, check out Public Storage: Sold on Craigs List!

Loan defaults will increase as well, but they’ve been at historical lows for so long this was inevitable. Moody’s expects the aggregate default rate on CMBS loans (0.75% as of November 2008) to revert to its long-term historical average of 1.5% to 2.0% in 2009, and most likely to surpass this level before the market begins to form a bottom in 2010 and 2011. They also expect commercial property values, which have declined about 10% from the peak reached in October 2007, to decline an additional 10 to 20% over the next 18 to 24 months.

Other than that, I’m assuming they would also like to wish everybody a happy and prosperous holiday season.

Click here for the full Moody’s press release on commercial real estate.