At the end of 2007, commercial real estate sales in the Unites States had hit a record high of $514 billion, according to a study done by Real Capital Analytics, a New York market research company. But in 2008, as the onset of the current economic recession began, an estimated $14.5 billion worth of commercial real estate deals fell through, according to data gathered by the commercial real estate firm of Cassidy & Pinkard Colliers. $1 billion out of the approximate $14.5 billion loss came from deals in the Washington region.

But all over the country today, the commercial real estate sector is facing the possibility of communal crisis. With fewer lenders giving out loans this year, sales of commercial property, including office malls and warehouses, are expected by some analysts to be half of what they were in ’07. 
 

Private Housing Sector Affecting Commercial Real Estate

So far, the sub-prime mortgage loan fiasco has only hit hard the private housing sector of the real estate industry. A surplus of nation-wide housing and bad loan practices have led to foreclosures and a lower demand for homes. California was one of the states hardest hit by the real estate bubble burst. For over a decade, California mortgage brokers and investors engaged in a variety of lending malpractices, as people bought up property at sub-prime rates with the hopes that real estate value would continue to go up indefinitely. Call it wishful thinking. As we all know now, that unfortunately didn’t happen.

But while the residential real estate industry was collapsing in 2007, the commercial real estate industry was experiencing one of its highest points in the past two decades. But many industry insiders and analysts believe that the private housing sector is bound to have an affect on the commercial real estate market sooner or later. Some see the $14.5 billion loss in commercial real estate deals in 2008 as the beginning of the commercial real estate crisis.

This is because establishments like factories, warehouses, office spaces, malls and other tenement buildings depend on the health of the private sector. With people losing their homes and in many cases their jobs, demand for commercial office and tenant spaces has gone down. All over the U.S. 19 million square feet of commercial real estate space was vacated last year. Renovation projects for unused commercial real estate buildings are only seeing some success throughout the country. Rents nationwide are stagnant and will most likely continue to go down as 2009 progresses.
 

Unemployment and Commercial Real Estate

If unemployment continues to grow, as it is likely to do before the economy bottoms out and stats rising again, consumers will continue to cut back on spending. This means that many commercial industries will see a decrease in demand for their products, which in turn will lead, inevitably to layoffs and cutbacks on spending on the part of commercial real estate owners. Less space will be leased, and acquiring a commercial loan will become increasingly difficult.

And there is also the decline in foreign investment to consider. Historically, foreign investors have played a big role in financing commercial real estate loans in the U.S. But as the American economy continues to spiral and consumer trends point to a general fear and a lack of confidence in the financial sector, investing in American property is looking more and more risky. The pulling out of foreign investors, of course, only helps to worsen the situation even more. This creates a cycle or decline that, thus far, is showing no signs of improvement.

But there are some deals that are still getting financed. They are usually smaller and involve multiple lenders and investors. But nonetheless, even the most pessimistic financial forecasts are forced to admit that the looming commercial real estate crisis will most likely not be as harsh as its residential counterpart.

In fact, some experts argue that there will be no such thing as a large commercial mortgage crisis. They point to the fact that, while the sub-prime mortgage crisis created a huge surplus in residential property, there is virtually no surplus in commercial property today. Unemployment has risen by 2 percent during the recession, and sales of commercial real estate have fallen accordingly. 

Because the commercial mortgage industry is tied to the nation’s economic trends, it isn’t likely that there will be a surplus of commercial property. Unlike in the residential sector, there aren’t many people, relatively, buying up multiple commercial properties and flipping them for profit. As the recession continues, commercial mortgage deals will probably decrease. But whether a massive crisis on par with the collapse of the residential property industry will occur in the commercial real estate sector is still up for debate.