commercial real estate prices
Tuesday, February 12th, 2008http://www.ft.com/cms/s/1/56c74950-d8af-11dc-8b22-0000779fd2ac.html
Property woes
Published: February 11 2008 14:41 | Last updated: February 11 2008 19:26
A two-year commercial property boom has cushioned the blow to the US economy from a collapse in housing investment. But as housing values continue to plunge, commercial property prices are also running out of steam. The two property sectors’ combined drag on economic output could peak over the next few quarters.
Fixed investments in residential property last year dropped by $96.2bn, or 16.9 per cent, from an already weak 2006 level, according to the Department of Commerce. That knocked almost a percentage point off GDP growth.
A $35.4bn jump in spending on nonresidential construction offset some of that decline. Commercial property has so far proved remarkably resilient. But investment growth is expected to slide this year, led by a drop in spending on hard-hit retail properties. It could turn negative by 2009 as prices continue to fall and investment in new offices and hotels starts to shrink. Construction spending on commercial properties could drop by 0.3 per cent in 2008 and 5.7 per cent in 2009, according to Moody’s Economy.com.
Investors are likely to suffer much sooner. Goldman Sachs, which bearishly forecasts a 21 to 26 per cent fall in commercial real estate prices through 2009, says banks could face $20bn from mark-to-market losses on loans in the short-term. That number could eventually quadruple, though defaults would probably arise over a longer timeframe than those in subprime residential lending.
Slower commercial construction spending could also hit employment. The economy has lost 500,000 housing-related jobs since March 2006, but some construction workers have been able to switch into commercial construction. If that option disappears, job losses will become more severe.
The drag on economic growth from reduced residential construction spending could level off, and the hit to bank balance sheets from subprime mortgages could soften. Even if that occurs, commercial real estate looks ready to trigger another leg down for both.